Credit

by Nicole Binkowski

The Basics of Credit

What is Credit?

Credit is the ability to obtain good or services before payment, based on the trust that the payment will be paid in full in the future.


What are the forms of credit?

Credit comes in many different forms. Two of the most common forms are personal loans and credit cards. Loans can be taken out for a variety of things, such as student, mortgage, car loans, etc. Credit cards are small plastic cards, similar to a debit card, that allow users to purchase goods on credit. Both of these are quick forms of getting money that you need at the moment, but you must be careful and realize that you eventually need to pay these costs back.


What costs are associated with credit?

Credit because it is NOT free. While using credit, you are always expected to pay interest (APR- Annual Percentage Rate). Interest is the money paid regularly for the use of money lent, or for delaying the repayment of a debt. You must be careful when using credit, because different types can cost you a different interest rates, and this may cause you trouble in obtaining a necessary loan further in the future.


What determines if someone gets credit and how much they get?

To determine if someone gets credit, the lender (person/institution that gives the loan) always looks at the individuals creditworthiness. This can be judged based on 3 simple things: Capital, Capacity, and Character.

Capital- the value of what you own (home, savings, etc)

Capacity- ability to pay off loan (high income, major expenses/debt)

Character- sense of financial responsibility (steady job, credit history, etc.)

At any point in time, also, the lender can contact the Credit Bureau and obtain your personal Credit Report. The Credit Bureau is an institution that has a complete record of every adults credit history. And a Credit Report is just that- your credit info and your credit score (number that reflects your creditworthiness). The stronger your credit report/score, the easier it will be for you to get a greater loan, and vice versa.

Credit Cards: What do you need to know?

What is a Credit Card?

A small plastic card, much like a debit card, that allows you to purchase good and services on credit. Even though it seems like you don't have to worry about spending money, there is an annual fee that you have to pay every year. Along with this, you also have an interest rate (APR), and have to pay your credit card company for borrowing their money.


Where can you use credit cards?

Credit cards can you be used virtually anywhere. You can use your card when grocery shopping, clothing shopping, out to eat, shopping online, paying for vacation, etc.


What are the benefits/costs of using a credit card?


The benefits of using a credit card are that you receive signup bonuses, investment rewards, frequent flyer-miles, safety, and insurance, all while building up your credit. The cost of using a credit card is that you don't have the physical money in front of you. This can be dangerous when going on spending sprees because you can easily go over your credit limit and pend yourself into ongoing debt. You always need to be careful how much you spend, because going over may bring you Over-the-Limit fees which come out of your pocket. On top of this, if for some reason you violate the companies agreements/requirements, they are subject to charge you a penalty fee.

Smart Consumers: Don't Fall into the Credit Trap

  • Start your credit once you turn 18, the younger you start the better for you.
  • Make sure you pay your loans on time, and are dependable to the bank.
  • You will definitely see penalty fees if you are not timely or follow rules.
  • Try to establish a good credit score so that you don’t have to pay as much money.

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