What is Credit?

Kathleen McDonald

The Basics of Credit

Credit is the ability to borrow money in return for a promise of future payment. There are two types of credit:student/personal loans and credit cards.

Credit is NOT free. Interest (APR) must be paid!

To get credit, you must demonstrate your creditworthiness by your reliability to pay back a loan and why. Lenders judge this using 3 factors: capital, capacity, and character.

  • Capital: value of what you own; savings, investments, property; use capital to pay loan if needed

  • Capacity: financial obligation to repay loan; high enough income; major expenses and debt

  • Character: sense of financial responsibility; dependability; credit history

The credit bureau collects information on consumers' credit and sells it. It has a record of every adult and assigns a credit score that reflects your creditworthiness. Credit score is between 300 and 850, which is also known as the FICO score (the higher, the better).

The credit report has credit information and the credit score. It is provided by Credit Bureaus and is requested by lenders. It occurs once a year for free (otherwise a small fee is paid) when you apply for credit.

Pros and Cons of Credit


    • Able to buy needed items now

    • Don’t have to carry cash

    • Creates a record of purchases

    • More convenient than writing checks

    • Consolidates bills into one payment


  • Interest (higher cost of items)
    • May require additional fees

    • Financial difficulties may arise if one loses track of how much has been spent each month

    • Increased impulse buying

Vocabulary Watch

Credit Cards: What YOU Need To Know

Common credit cards used are VISA, MasterCard, Discover, and AMEX. Many credit cards come with incentives such as cashback, points, and airline miles. American Express, a regular charge account, must pay balance in full. VISA and MasterCard, revolving charge accounts, can carry balance from month to month.

Establishing credit now will allow you to use credit easily in the future. It is much better to begin when you turn 18. Start small by storing credit because it is easier to get approved and co-signers promise to pay debts. Preferred cards DO NOT COUNT.

Credit card costs include annual fees, interest (APR), and credit limits. Annual fees require annual money amount that you must pay. They usually range from $15 to $100. Interest (APR) is usually 0% to 29%. If you pay the entire balance by the due date, then there is no interest. Credit limits is the max amount you can spend using a card. Being over limit can result in a penalty fee or have your card declined. Approximately $30 for each charge can be made beyond the limit.

Credit card fees include over-the-limit, late fees, and penalty fees. Over-the-limit means going over the credit limit. Making a payment late is a late fee. Penalty fees are additional fees due to late payment, over credit limit, returned payment, etc. It could also result in an increase in interest rate.

Comparing Credit Cards

Discover it Miles-Discovery.com

  • No annual fees
  • 0% Intro APR† for 12 months on purchases, Then 11.24%-23.24% Standard Variable Purchase APR applies
  • Incentives: Redeem Miles, In-Flight Wi-Fi Credit, Freeze It, Free Overnight Card Replacement, 1.5x Miles on every dollar you spend

Discover it Chrome for Students-Discovery.com

  • No annual fees
  • 0% Intro APR† for 6 months on purchases, Then 13.24%-22.24% Standard Variable Purchase APR applies
  • Incentives: Good Grades Rewards, Cashback Match, Freeze It, Free Overnight Card Replacement, 2% cash back at gas stations and restaurants

Making a Decision

Between these two cards the best choice for many students would be the student card. Since many students don't travel on a regular basis the rewards from the miles card would be useless. The student card also gives more cash back at gas stations and restaurants which are two of the most frequent places that many students go, and it also has a lower APR than the miles card. So, the best choice for a student would be the student card.

Discover it Miles

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Discover it Chrome Student

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Smart Consumers: Don't Fall Into the Credit Card Trap

Control Credit Card Costs

Consider a loan as opposed to using a credit card

  • Interest may be lower

Pay credit card balance in full

  • Avoid minimum payment trap

Choose card wisely

  • Least expensive; greatest benefits

Other tips:

  • Avoid too many cards

  • Pay cash

  • Don't miss payments

  • Read what you sign

  • Avoid identity theft

  • Seek credit counseling if needed

  • Beware of bankruptcy

Don't get too excited with your credit. Remember to be smart with your money.

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