Credit 101

The basics about credit and why it is important.

The Basics of Credit

Credit is the ability to borrow money with the promise to pay it back in the future. Credit can come in many different forms such as personal loans, student loans, or credit cards. As great as credit can be, it is important to understand credit is NOT free.

Credit is a loan, not a grant. When someone pays back their loan, the lender will require them to pay an interest rate or an annual percentage rate (APR) in addition to the loan. It is important to pay back your loan because this will affect your creditworthiness which is your reliability to pay back a loan.

A lender can find out you're reliable enough by checking with a credit bureau which is a company that collects your credit information. This company assigns each adult a credit score. A credit score is a number ranging from 300 to 850 on how well you handle your ability to repay a loan. Lenders will also look at a credit report provided by the bureau to view your credit information and score. The better your score is, the greater chance there is that you will get your loan and not pay as much as someone with a bad score.

Vocabulary Watch

Credit Cards: What you need to know

A credit card is a plastic card issued by a bank or business allowing holder to purchase goods or services on credit. You can use credit cards in stores or when trying to use a service.

When you pay back a loan you also need to pay an interest rate (APR) in addition to the loan. It is important to know what credit cards come with multiple fees. Some credit cards require you to pay for an annual fee for having the ability to use that specific card. There are also penalty fees for late payments or exceeding your credit limit. A fee for going over your limit is also called an over-the-limit fee.

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

When having a credit card, it is important to make sure you are using it wisely. Impulse buying and shopping sprees can result in accumulation of massive credit card debt. This can ruin a person's credit score which will make it hard for them to have a good creditworthiness reputation. A bad reputation can result in not being able to get loans on things like a car or home because the lender won't know if you'll be able to pay them back. Creating a budget or using cash instead of a credit card can help a person stay out of debt and maintain a high credit score.