Credit

Buy now, pay later

The Basics of Credit

It's really easy to think of credit being "free money". Credit is the ability to borrow money in return for a promise of future payment. You can use a credit card to take out loans and make big payments on expensive items. This money comes from the lender, which is the bank, and they borrow you money that you have to eventually pay back later. In order for the bank to make some money, you will be paying interest on the borrowed money. Not everyone can borrow money from the bank though, you must show you're a reliable person and you're able to pay back the loans you take out. Creditworthiness shows if you're trustworthy enough by simply taking a look at your credit score. There are many different forms of credit such as student loans, credit cards, personal loans, etc. These are called personal loans, they are for private individuals. Your credit score is very important, for most places, if you do not have a high credit score, they will not give you a loan. Your credit score is determined by your capacity to repay a loan. If you cannot repay your loans, it will go down. The company that knows all of your information is called the Credit Bureau and they allow your information to be available to credit card companies and financial institutions so they can see all of your information and see if you are reliable or not. When you're signing up for a credit card, the company can take a look at your credit report and easily see what your credit history is and your financial behavior. This helps them determine whether or not you will be a good customer.

Vocabulary Watch

These three words will help you get credit:


Character: A sense of financial responsibility.

Capacity: Financial ability to repay.

Capital: The value of what you own.


What You Need to Know About Credit Cards

A credit card is a small plastic card issued to users as a system of payment. This card is very light and easy to carry around and is basically "free money". You can use this card for anything but you should really be smart with it and only use it for major expenses such as a car, furniture, electronics, etc.


Benefits:


  • Sign-up bonuses
  • Cash back
  • Investment rewards
  • Frequent-Flyer miles
  • Reward points
  • Safety
  • Grace Period
  • Building credit
  • Universal acceptance


Costs:


  • Blowing your budget
  • High interest rates
  • Increased debt
  • Fraud

Credit (Continued)

There are quite a few fees that may come along with the credit card you sign up for. Most credit card companies require a annual fee which is just a simple fee that is required every year. There are also interest rates (APR) that is regularly paid at a particular rate, but not every company has these rates. If you do not pay your balance on time, you will be charged a specific penalty fee that is different for every company. You might have to pay these fees if you go over or exceed your credit card limit. These companies can charge you for these mistakes because in the beginning, when you first signed up, you signed an cardholder agreement for your account. Each credit card comes with a limit that you can change. This limit becomes the maximum amount of money you can spend on that card. This helps a lot of people budget their expenses.


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

TIPS: When using a credit card, you must be smart with what you use it for.
  • You should definitely keep track of all of your purchases when using a CC and also you should watch your budget and make sure you don't go over it.
  • Be careful who you give your information to, make sure the sources are reliable.
  • Pay off the balance on your cards at the end of every month.