What is Credit!

By: Edgar Lopez

The Basics of Credit

Credit the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.

Anyone over the age of 18 can qualify for a credit card, but those who are young and have no income may need a qualified co-signer for the bank to approve the card. Getting approved for a credit card is much easier if the applicant has a steady income, a good credit history and a small amount of debt.

Types of credit

Loans let you borrow money that must be repaid with interest. You can obtain a loan for a specific purpose, such as financing a new car, paying college tuition and buying or renovating a home. You can get a debt consolidation loan, which combines all current debts from various creditors into a single reduced-interest payment plan. You can also get a credit limit linked to your checking account that gives you bounce-proof protection in case you write a check for an amount that exceeds your account balance.

  • Secured loans are guaranteed by collateral, which is an item of equal or greater value than the amount of the loan, such as a car, home or cash deposit.

  • Unsecured loans do not require collateral and are made based on your credit score and ability to repay.

  • Installment loans are made for a fixed amount at the time of your application and approval. This type of loan is repaid in fixed monthly payments over a specific period of time. The interest charges are included in the payments. Auto loans and mortgages are examples of installment loans.

  • Credit cards are perhaps the most common type of personal credit. Unlike installment loans, credit cards allow repeated transactions up to a maximum credit limit, also known as your available credit limit. Each time you charge something, you are borrowing the money until you pay it back. If you decide to pay the money back over time, the credit card company adds interest charges to your account. Each month, you will pay a calculated amount until the borrowed amount is repaid.

Credit score:a number assigned to a person that indicates to lenders their capacity to repay a loan.

Credit Bureau: a company that collects information relating to the credit ratings of individuals, like financial institutions, etc.

Credit Report: A detailed report of an individual's credit history prepared by a credit bureau and used by a lender to in determining a loan applicant's creditworthiness, including.

Creditworthiness: An assessment of the likelihood that a borrower will default on their debt obligations. It is based upon factors, such as their history of repayment and their credit score.

Interest (APR):The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

Lender:an organization or person that lends money.

Credit Cards: a small plastic card issued by a bank, business, etc., allowing the holder to purchase goods or services on credit

Personal Loans: is an unsecured loan, meaning the borrower does not put up any collateral or security to guarantee the repayment of the loan. For this reason, personal loans tend to carry high interest rates. If a borrower owns a home, a lower interest rate alternative is a home equity loan.


"Smartly Tips"

  1. Pick the best credit card for you

  2. Use credit cards to buy almost everything

  3. Pay off the balance in full each month

  4. Take advantage of rewards

  5. Track all of your expenses