The Basics of Credit

By Paulina Kruk

Section 1- General Information

Credit is the ability of a customer to obtain goods or services before payment. The customer must pay back what he or she has spent in the future. A Credit Bureau is a company the collects information relating to the credit ratings of individuals and makes it available to credit card companies, financial institutions, etc. A Credit Report contains information about your credit such as bill repayment history or the status of your credit accounts.


There are three different forms of credit: loans, installment loans, and credit cards. Loans let you borrow money that must be repaid in interest. Installment loans are made for a fixed amount at the time of your application and approval and then is repaid in fixed monthly payments over a specific period of time. A credit card is a small plastic card issued by a bank, business, etc., that allows the owner to purchase goods or services. Each time you charge something, you are borrowing the money until you pay it back. Each month you will pay a certain amount until the borrowed amount is repaid.


There are costs to using credit. The amount of interest is affected by the principal, the amount of the loan or 'money' spent on a credit card. The amount of interest is affected by the time it takes the borrower to repay the loan. The amount of interest is also affected by the interest rate charged for the loan.


A credit score can be anywhere from 300 to 850. 300 being the most risky and 850 being the most secure for a lender. Creditworthiness is important in judging what your credit score will be. The most important factor in having a good credit score is whether or not you pay your bills on time. The difference between your total credit limit and total amount owed is the next most important factor. The length of your credit history accounts is another important factor. The two remaining factors are involved with having new accounts and applications for credit and the diversity of credit types you have. Too many new accounts and applications at one time result in a lower number. More diversity of credit types makes for a better score.

Section 2- Vocabulary

Creditworthiness: to get credit you must demonstrate "creditworthiness". It is your reliability to pay back a loan. Lenders judge that reliability by character, capital, and capacity.


Capital: value of what you own, savings, investments, property


Capacity: financial stability to repay a loan, high enough income, major expenses and debt


Character: sense of financial responsibility, dependability; steady job, long term residence; good credit history

Section 3- Credit Cards

As I mentioned before, a credit card is a small plastic card issued by a bank, business, etc., that allows the owner to purchase goods or services. Each time you charge something, you are borrowing the money until you pay it back. Each month you will pay a certain amount until the borrowed amount is repaid.


Using a credit card allows you immediate access to pay for something if necessary. If you lose it, you can just cancel it which is a lot better than losing money since you can't get that back. Credit cards are also helpful with budgeting since you need to keep track of everything in your cash register. A lot of places accept credit cards now, like restaurants and movie theaters. It's a quicker method of payment. But a credit card also comes with a credit limit so you can only use it for so many goods or services before you reach the maximum amount of spending.

Using a credit card also comes with its cost in interest and fees such as a penalty fee where you pay for not following the rules in credit card usage. There is a yearly fee called the annual fee that you need to pay in order to use the credit card. It's important to keep track of your spending so you can ensure that you can repay your credit card bill in full.

Section 4- Tips for Credit Card Usage

  • Pay off your balance every month
  • Use the card for needs, not wants
  • Never skip a payment
  • Use the credit card as a budgeting tool