Credit Newsletter

By: Mirza Sutkovic, Period: 7/8

What is credit?

Credit is a like a digital I.O.U. Credit comes in many forms, but it most predominantly is influenced by the use of credit cards. Credit allows you to buy now, pay later. You can pay off credit debt by small payments over a period of time or pay it all up front. Credit is NOT free. Those who fail to see this often get stuck with long-term consequences.

What can influence credit?

Credit is influenced by many factors, but as previously stated, it mostly relies on wise use of a credit card and making credit payments on time. Credit can also be influenced by failing to pay utility bills on time. If your utilities get discontinued and you get sent to collections, your credit will be taking a hit. Credit can also be influenced by having too much money owed on your accounts.

How does credit work?

Credit, as previously stated, does not come free and does have penalties for using too much credit and not being able to pay it back. For example, if someone payed for something that costs $1,000 and he/she used a credit card for the purchase, that person would not only have to pay that $1,000 balance, but also with interest. Say their interest was 15% per year (APR), that person would have to pay an additional 15% of the balance. So that person would have to pay $1,150 all together. Whether they fail to make these payments or whether they make these payments on time will effect their creditworthiness and ultimately your credit score.

The three C's of credit.

Creditworthiness, the reliability someone has in paying back a loan, depends on three things:

Character: Character depends on the previous payment history of the person, and with that information people can gauge your honesty to repay debts.

Capital: Capital is like collateral. It is the personal assets you own that can be used to repay debt when money isn't readily available.

Capacity: Capacity is like your overall ability to repay your debt. The lender will look if you have a steady source of income through employment.

Consequences of bad credit

Credit is gauged by a credit score system. A person's credit score ranges from 300 - 850 and is influenced by wise use of a credit card and making debt payments on time. Primarily lenders use this credit score system to make a decision on whether to accept a loan request or deny it. Real estate and car purchases also involve credit score to see if a person is reliable enough to pay the rest of the charge after a down payment. With a bad credit score, chances are that most real estate owners and car dealerships will not likely do any business with you, and its the same deal with lenders.