Understanding Credit

Olivia Phoenix

The Basics of Credit

Credit allows a customer to obtain goods or services before payment with the expectation that you'll pay back these loans. The likelihood of being approved to take out a new loan is demonstrated through your credit score. Your credit score also determines if someone is eligible to collect credit and how much they'll be given. To receive your credit score, a lender has to establish your creditworthiness based on your credit report that was provided to them by a credit bureau. Credit can come in many forms such as, car loans, home mortgage, personal loans, student loans, credit cards, ect. Some benefits of using credit are as follows: use purchase (or enjoy service) as you pay for it, ability to buy necessities you can't afford, helpful in financial emergencies, convenient, builds good credit history, and save money by taking advantage of sales. Some costs that come with credit usage include purchases costing more than the original amount due to both fees and (APR) interest rates, ties up future income, encourages overspending, can lead to major financial and liquidity problems, if used irresponsibly.

Creditworthiness is Built on the 3 C's (Vocabulary Watch)

Character - how a person has handled past debt obligations: From the credit history and personal background, honesty and reliability of the borrower to pay credit debts is determined.

Capacity - how much debt a borrower can comfortably handle

Capital - current available assets of the borrower, such as real estate, savings or investment that could be used to repay debt if income should be unavailable.

Credit Cards: What You Need to Know

A credit card is a plastic card issued by a financial institution that allows its user to borrow pre-approved funds at the point of sale in order to complete a purchase. Credit cards often come with a credit limit, which refers to the maximum amount a credit card company will allow someone to borrow on a single card. Credit cards can be used practically anywhere, especially overseas. Benefits of using credit cards are that they provide immediate access, security, financial backup, discounts and rewards, cash back, build your credit history, keep records of your expenses, raise your credit score, and withhold payments. Some costs that are associated with credit cards include going over budget, (APR) interest rates, annual fees, (late payment) penalty fees, over-the-limit fees, increased debt, and credit card fraud.

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

1. Keep track of your purchases by closely reviewing your monthly statements.
2. Have a budget and avoid overspending.
3. Make an effort to pay off credit card balances at the end of the month.
4. Make purchases with reliable companies and take extra precautions when making purchases online.
5. Report stolen cards immediately to the credit card company.