Smart Spending

All you need to know about credit

What is credit ?

Credit is the ability to borrow money in return for a promise of future payment. Its is NOT free. it can help you purchase things now rather than saving a waiting to spend in the future. However the spender is required to pay interest. Say you purchase shoes for $100 and the interest rate is 15% a year the shoes will have cost $115 by the end of the year.

Types of credit

One can borrow money either through loans and credit card accounts.

When you take out a loan you get your money all at once, then you must make specific payments to pay the loan back by a specific date. When using a credit card the amount you purchase is added to your account. The account has no specific payoff date you are only required to pay off a minimum each month.

Student loans - designed to help student pay for a higher education tuition, books and living expenses. Its different from other loans because the interest rate may be lower and the repayments may be deferred while the student is still in school.

Secured loans- is backed by something of value to ensure payment

Unsecured loan- not backed by collateral leander gets credit based on your creditworthiness alone. This is also known as a personal loan.

How to qualify for credit

To qualify for credit you must demonstrate your credit worthiness; by proving that you are reliable to pay back a loan. Lenders judge one's credit worthiness by one's capital, capacity and character. They can see this through Loan applications, which show your assets income and liability, and the credit bureau, which collects information on consumer credit and sells it.

Vocab Watch

Credit Cards: What you need to know

A credit card allows you to borrow money from your bank to make a purchase. You are required to repay a minimum each month, but alsong as the minimum is payed off you can continue spending. If you fail to pay it back during that month you are then forced to pay interest on top of what you borrowed. This is called and APR it is multiplied by 12 so every month you'll be charged 1% of the money you owe. If you make a late payment you'll have to pay a penalty fee. Each card has a credit limit, It is the maximum amount a bank will allow someone to borrow on a single card. Sometimes your credit card will let you go over your credit limit if it does you'll have to pay a over-the-limit fee. You also have to pay annual fee, which is a fee charged by the company each year for use of a credit card.

Benefits and costs

With a credit card you can make a large purchase now and pay it off in smaller chunks. It also makes budgeting easier, and it's easier than carrying around a wad of cash. It also allows you to build up your credit score. However, you can easily go into debt if you are not careful with your spending. The ease of credit card use can cause you to overspend. interest rates can also make even the smallest debt seem large over time.

Smart consumers: Don't fall into the credit trap

You should choose a credit card that is right for your needs, if you carry a balance, you can find credit cards that spezaize in low interest rate. You should also avoid using the card for discretionary spending, because that can easily lead to debt. And lastly make sure you are going to be responsible with your spending before acquiring a credit card. It is better to not own a credit card then to own one and misuse it.