It's like imaginary money, but it's not!

So, what is this newfangled credit thing everyone is talking about?

When simplified, credit is basically money that you borrow and pay back at a later time. For example, when people go to college they can't pay their tuition all at once, so they take out student loans. This is when you borrow money from the bank to pay for tuition that you will pay back over time with interest. Interest is when banks add small amounts of money to your fee and is also known as APR or an annual percentage rate.

Banks determine if you're able to get credit based on your creditworthiness. Whats creditworthiness? It's basically your financial history and how much the bank can trust you. Any loan, bounced check, missed a payment, or any history of bankruptcy or being sued is recorded by the Credit Bureau. That information is then taken an made into your credit score. Your credit score is then put into your credit report along with your credit information which is given to you once a year for free. The report is then given to Credit Bureaus and lenders. The Credit Bureau will use your credit report to allow you apply for credit, lenders will use it to see if you're able to get loans.

Examples of credit and loans are credit cards and personal loans. Most people know what credit cards are, but if you don't, it's basically a debit card that you use and pay the money back later. A personal loan is something like a loan for a car or a home. The thing that is different between a personal loan and a secured loan is a personal loan has a lot higher interest and doesn't have as much security saying that you're going to pay back the loan.

Things you need to make sure you know.

The Three C's of Credit

  • Capital

- The Value of what you own

- Savings, investments, and property

- It's possible to use capital to pay a loan if needed

  • Capacity

- Financial ability to pay back a loan

- High enough income

- Major expenses and debt

  • Character

- Sense of financial responsibility

- Dependability

-Steady job

- Residency (Long Term)

- Credit history

- Bills on time

Credit Rating (aka Credit History)

  • Score between 300 and 850

-The higher the better

  • Things that effect your score...

- On time payment - good score

- Low debt - good score

- Long history - good score

- Limited number of credit cards - good score

APR (Annual Percent Rate)

  • Example

You have $1,000 with an interest rate of 10% per year

$1,000 x 0.10 = $100

$1,000 + $100 = $1,100

It will cost you $1100 to borrow $1000

Credit Cards

What is a credit card? A credit card is a debit card that you can use to make purchases anywhere and pay them back later. Now most people use their credit cards only when necessary like to pay bills if they don't have the money at the time or to buy groceries to feed their families. You can also open credit cards through stores like Home Depot or Sears that you can only use at those stores. The nice thing about using credit cards are you can buy things and just pay them off later, but the problem with that is you have to pay interest on your purchases. I showed in the example of having 10% APR on a $1,000 loan will end up costing you $1,100 in the end.

When opening a credit card you have a lot of fees you'll have to pay. One you have to pay every year is an annual fee. An annual fee is an amount of money you pay every year to keep your credit card account open. There are also fees that you will end up having to pay for mistakes you make. The one that credit card holders have to deal with the most are "Over-the-limit" fees. Every credit card is set up with a credit limit which is when the holder can only spend so much money with their card in a certain amount of time. A fee like this and fees for things like turning in a bill late or not paying are known as penalty fees. These fees are to penalize people for not following the procedures they agreed on with they opened the account.

Credit Card Trap

The number one problem with credit cards is how much people abuse them. Something everybody should take into consideration when getting a credit card is what they're going to use it for. They need to make sure they don't just use it to buy luxury things like clothes or taking out loans for a fancy car or a nice house.