Understanding Credit

By: Uriel Martinez

The Basics of Credit

In a perfect world, you would be able to afford all of your purchases with your current income--this is not always true. You can borrow money from a lender with the promise of future repayment, or use credit, to solve this conundrum. The two primary types of credit are loans and credit cards. There are also secured and unsecured loans as well, which are "secured" by a collateral that gives the financial institution more security in taking the risk of giving you a loan, such as a personal loan.


Some of the benefits of credit are that you can buy thing sooner than you could get them by saving. Because of this, you can buy a house, a car, further your education, and pay for medical expenses among other things.


The downside with that you are sacrificing future spending for current spending. Furthermore, you will often times pay more for a product in the long run because of interest, which is dependent on your APR.


If after weighing the benefits you decide to get credit, how much you get will be determined by your ability to pay back a loan, or creditworthiness. This is determined by your capital, the value of what you own; capacity, a measure of your financial ability to pay a loan; and character, a measure of your sense of financial responsibility, whether or not you are dependable, and have a good credit history. All of this information is gathered by credit bureaus to calculate your credit score and ultimately your credit report, a history of your credit.

Vocabulary Watch

Credit Cards: What You Need to Know

A credit card is a small plastic card that is typically issued by a bank and allows the holder to utilize credit to buy goods or services. They usually come with annual fees and can also limit the amount of credit you spend with the use of a credit limit--going over this limit results in an over-the-limit fee.


Credit cards can be utilized in any number of places including department stores, grocery stores, amusement parks, restaurants, etc. Many businesses take credit cards and if they do not, they will let you know. For purchases that deal with larger amounts of money, loans are the most commonly used option instead, as credit cards deal with smaller amounts of money.


Credit cards allow consumers to purchase more goods, and the more goods that are bought, the more people are needed to make those goods, thus creating jobs. With more jobs, there is an increase in money of people are able to spend, and people use their credit to purchase even more goods--as you can see, credit cards lead to a positive feedback loop of benefits.


On the other hand, the same can be said for the costs. People overuse credit and cannot afford to pay it off. As a result, penalty fees follow and their interest builds--the rate of this accumulation is dependent on their interest rate or APR. This leads them to fall into debt, providing an incentive for them to refrain from purchasing goods. The outcome is a decrease in the demand for goods and a decrease in the need for jobs; no jobs means less spending and a lower demand for goods, which results in job cuts.

Shopping for Credit

Discover it® for Students Card

Annual rate: $0

APR: 13.24%-22.24%


Fees

  • Late Payment: None the first time you pay late. After that, up to $37
  • Returned Payment: Up to $37
  • Balance Transfer: 3% of each transfer
  • Cash Advance: either $10 or 5% of the amount of each cash advance, whichever is greater.


Incentives:

  • No late payment for the first time

  • $20 cash back each school year if your GPA is 3.0 or higher for up to the next 5 years

  • Get a dollar-for-dollar match of all the cash back you've earned at the end of your first year, automatically—only for new cardmembers

  • 5% cash back in categories that change each quarter that is offered to all cardmembers up to the quarterly maximum when you sign up

  • 1% cashback on all other purchases with no cap

  • Can redeem your rewards for cash in any amount at any time

  • Your cash back never expires

  • Can use your rewards instantly at Amazon.com checkout

Advantages:

  • No annual fee
  • No first late payment
  • No minimum return payment
  • More rewards/incentives

Disadvantages:

  • Shorter grace period
  • Higher maximum return payment

BankAmericard Cash Rewards™ Credit Card for Students

Annual rate: $0

APR: 13.24%-22.24%


Fees:

  • Late Payment: up to $37
  • Returned Payment: up to $27
  • Balance Transfer: 3% of each transaction (minimum of $10).
  • Check Cash Advances: either $10 or 3% of the amount of each transaction, whichever is greater.
  • Cash Equivalent Cash Advances: either $10 or 5% of the amount of each transaction, whichever is greater.


Incentives:

  • 1% cash back on every purchase

  • 2% at grocery stores and wholesale clubs

  • 3% on gas

  • $2,500 in combined grocery/wholesale club/gas purchases each quarter

  • Online $100 cash rewards bonus after making at least $500 in purchases in the first 90 days of your account opening.

Advantages:

  • No annual fee
  • Longer grace period
  • Lower maximum return payment


Disadvantages:

  • Minimum return payment of $10
  • Less rewards/incentives

Smart Consumers:

Don’t fall Into the credit card crap with these simple tips...


  1. Limit your number of credit cards
  2. Use credit only for your needs rather than your wants
  3. Be aware of the amount you owe
  4. Pay off what you can as quickly as possible so you avoid gaining interest
  5. Only borrow what you can pay back.