The Basics of Credit

A Guide to the Real World

Just What is Credit?

Credit is the simple system of borrowing money from a lender with the promise to pay them back later. There are two different types of credit called secured loans and unsecured loans. Secured loans must be backed by something of value, known as a collateral. This means that if you fail to acquire enough money to pay back your loan, you will need to sell your collateral. The second type of credit is an unsecured loan, which is not backed by a collateral. This type of credit is more risky for the lender, so they will charge higher Annual Percentage Rates(APR) and judge your creditworthiness based on your credit score alone. This score is determined by your credit report, which is a list of all your payments and debts kept by the Credit Bureau.

Credit comes with a few consequences. Credit companies charge APR to make you pay a certain percentage of what you have borrowed. Rates can range from as low as 10% to as high as 20%, depending on your credit score. If you took a personal loan for $10,000 and the company charges you an APR of 15%, you will owe them an extra $1500. Another downside of credit are fees. These can be service charges, monthly fees, or annual fees. Fees can seem like no big deal, but beware of what they can add up to.

Credit is different for everyone. This is because credit companies buy our credit history from credit bureaus to find out our creditworthiness. Creditworthiness is most commonly based on a credit score or FICO score. This score is determined by assessing all of your payments, debts owed, types of credit used, and length of your credit history. Having a low credit score will mean that credit lenders will charge you a high APR as well as put a limit on how much you can lend. The key to retaining a high credit score is to pay bills on time, keep your credit card balances low, and manage your debt. Having a good credit score improves your chances of obtaining finances when you need them.

Credit Cards: What You Need to Know

Benefits and Penalties of Credit Cards

Credit cards are a type of payment card that allow the user to pay for goods and services using the lenders money in return for promising to pay them back. Credit cards aren't required to be payed back every month. Instead, a balance of debt is allowed to stay, however, interest is charged on this balance. Credit cards can be used anywhere a merchant is willing to take them. Electronic verification is used to make sure the credit card is valid and there is enough credit to cover the purchase. Besides interest, some credit card companies will charge an annual fee for using their credit card, but his fee has recently become less common. Credit card companies also charge penalty fees. These fees can range from over-the-limit fees that occur when you surpass the credit limit set by your lender or late fees that occur when you don't pay a bill on time. But don't be discouraged by all of these downsides to credit cards. There are many benefits including sign up bonuses that give you money when you apply for a new credit card. You can also earn rewards through points systems. When you reach a certain amount of points you can redeem them for rewards such as airline tickets or gift cards. Lastly, some credit card companies offer cash back, which gives you a certain percentage of your total purchases back to you; this can range anywhere from 1%-5%.

How to Avoid Credit Card Pitfalls

  1. Read the Fine Print: don't gloss over fine print before you apply for a credit card. There are hidden fees that the law does not protect consumers from.
  2. Don't Miss Due Dates: This can allow credit card companies to raise your APR or charge penalty fees.
  3. Don't get too hyped about point rewards: Credit card companies are trying to make money at the end of the day. They benefit the most when you spend more money.