The Guide to Credit

Everything You Need to Know!

The Basics of Credit

You hear everyone around you talking about credit. Credit cards, mortgages, and student loans are all forms of credit, but what is credit? Credit is the ability to borrow money now with the promise to pay that amount back in the future. Credit exists in several forms. A credit card is a plastic card that works like a debit card, but instead of taking money out of a personal checking account, you are borrowing money from a company. The company is the lender that loans you money that you'll have to pay back later. At the end of each billing period, you have to pay the debt off to the credit card company. Another type of credit is a student loan, usually borrowed to pay for college or a higher education. Any other personal loan (for a car or mortgage) is also considered credit.

Although the "Buy Now, Pay Later" concept may sound appealing, there are several costs that come with borrowing on credit. First off, not everyone qualifies for credit. There are several factors that determine if someone gets credit and how much they get. When applying for credit, companies will determine your creditworthiness by looking at your credit report. A credit report is a document issued by credit bureaus that list any filed bankruptcies, debts, criminal violations, lawsuits, bounced checks and missed payments. Another item on a credit report is your credit score. Your credit score is a number ranging from 300 to 850. The higher the number, the more creditworthy you are. Depending on your credit score and your credit report, the credit company will determine if you qualify for credit and how much you can borrow.

Another cost associated with credit card is interest. Interest comes in the form of an annual percentage rate or APR. The company charges you additional for borrowing money from them. Your APR can be a fixed rate, but often times it varies depending on your credit score. Credit could also be overused, which could lead to heavy debt. There are also specific to credit cards.

Vocabulary Watch!

Credit Cards:

What You Need to Know

The most popular form of credit is probably credit cards. A credit card is a plastic card that can be used to make purchases using borrowed money. It's similar to a debit card, but every time a purchase is made, the money is borrowed from a company and is recorded to be paid back at the end of the month. Credit cards can be used almost anywhere. The majority of stores accept credit cards. Some stores may only accept a certain type of credit card, such as MasterCard or Visa. Credit cards can be used to make small purchases, such as a bag of chips or some groceries, or larger purchases, like a new T.V.

Like with everything else, there are pros and cons to using a credit card. Starting off with benefits, credit cards allow consumers to buy a product now and pay for it later. Consumers are more likely to buy more products if they don't have to pay for everything as they go. If the demand for goods increases, there is a higher demand for people to make the goods, which results in an increase in jobs. Certain credit cards also come with specific benefits. Different companies offer rewards and features such as flyer miles, early access to concert tickets, and travel insurance. Another benefit to using credit cards is the ability to spread payments over a longer period of time.

However, there are also costs to using a credit card. All credit cards have a credit limit, or a maximum amount of money the consumer can spend/borrow. The credit limit varies depending on the type of card and the company. If you go over your credit limit, you could be charged an over-the-limit fee. Other penalty fees include late payment, cash advance, and returned checks. Some companies have an annual fee they charge customers for having a credit card account. On top of the amount borrowed, consumers are also charged an interest rate(APR). APR varies depending on the company and card, but most companies have a free introductory period.

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

  • Limit number of credit cards.
  • Avoid making late payments.
  • Make smart and rational purchases with your credit card.
  • Watch how much you spend to avoid going over your credit limit.
  • Start off with a small credit card account.
  • Weigh out different card options before opening an account.

By: Shannon Le