How to Use Credit

By: Matthew Sifuentes

Credit Basics

Everyone uses credit at some point, but who actually knows what credit is?

Credit is the ability to borrow money and pay it back with a certain percentage of money added on to it. The percentage added on is called interest, and the percentage added on to the original amount borrowed is determined by one's credit score. A person's credit score is a number that shows how creditworthy someone is, and is determined by someone's ability to make their payments on time. A person's creditworthiness helps to show how well a person pays back their credit.

The number assigned to a person's credit score is determined by the Credit Bureau. The Credit Bureau provides people's credit history, or their credit report, to lenders so that they can determine how likely someone is to pay back a loan, as well as how much interest to add to the loan. A person's credit history is a record of how well they have repayed their credit, and can help a person to detect if their identity or credit card has been stolen.

Although most lenders make loans that people are required to pay back, some people can make personal loans, which have nothing to guarantee that the money lent will be payed back.

Another way that credit can be determined, other than loans, is through credit cards. Credit cards provide credit that can be used to pay for various items, but all the money must be repayed with a small amount of interest. Credit cards can also carry their balance from month to month, but once they have reached their max limit, any extra purchases using the card may cause the card to be declined or add on penalty fees to the amount owed.

Vocabulary Watch

What You Need to Know About Credit Cards

Credit cards allow you to pay for goods or services, with money that isn't yours, but you must pay back all the money you have spent with interest along with an annual fee to use the card(s). The interest rates on credit cards range from 0%-29%, while annual fees range from $15-$100.

Although it seems like credit cards can be used endlessly, most cards have limits to them. Surpassing a cards credit limit will cause penalty fees and over-the-limit fees to be activated. Penalty fees add onto one's credit card bill, and could result in higher interest rates, while over-the-limit fees add on a certain amount of money to the bill for each purchase made past the limit.

Although the information above may seem like vary large drawbacks, they should not be very much of a problem if you can handle your finances well. Credit cards can also be very useful as they can help to make purchases when you do not have enough cash to pay for them, and many credit cards give benefits for using them.

Tips On: Staying Safe With Credit Cards

1) Do not use your credit cards excessively.

2) Pay back as much as you can for the bill to help heighten your credit score while keeping your debts low.

3) Try to avoid having multiple cards, and try to get cards with good benefits and low interest rates.

4) If your credit card is maxed, do not attempt to continue using it. As this will make you have to pay more.