All About Credit

Kamilla Wielgat

THE BASICS OF CREDIT

What is Credit?

Credit is described as the ability to borrow money in return for a promise of future payment... in other words BUY NOW, PAY LATER!

WHAT ARE THE FORMS OF CREDIT?

Credit card - Allows you to purchase goods/services and withdraw cash

Personal Loans - You get loans from a bank/lender. Loans can be paid off in monthly installments throughout a specific period of time. You can take out loans for larger payments such as college tuition, car payments and house payments.

Overdrafts - When banks allow you to withdraw money after your account balance hits zero (there is usually a limit as to how much you can take out.)

What benefits and costs are associated with credit?

Benefits:

  • Allows people with jobs to purchase more goods
  • You could build your credit score, which will make you look more trusting when making bigger purchases
  • The higher your credit score, the better
  • How does one build their credit score? -----> Make on time payments, have a low debt, long history and a limited number of credit cards


Costs:

  • Many people overuse credit
  • Many fall in debt
  • Many end of paying off debt instead of buying goods
  • Credit is NOT free... you must pay interest*


*Interest - Interest or an interest rate is the amount you have to pay in exchange for the amount of money you borrow (usually around 10%, 15%, 20%)

What determines if someone gets credit and how much they get?

Your bank can test your "creditworthiness" which means they are testing how much they can trust you with your credit. They can contact the credit bureau to test your credit through the "Three C's" which are:


  • Capital - The value of what you own
  • Capacity - Financial ability to repay a loan
  • Character - Sense of financial responsibility

VOCABulary watch!

  • Credit Score - Your credit score is based off of your credit history and determined by whether or not you pay off your credit/debt. The higher the score, the better!
  • Credit History - Your credit history describes how you use money. It is based on how many cards you have, how many loans you have and if you pay your bills on time.
  • Grace Period - How much time you have to pay off your credit card bill without having to pay interest.

Credit cards: what you need to know

What is a credit card?

A credit card is a card that allows you to borrow money from the bank if you don't have it right away. As long as you pay back the money within the grace period, you don't have to pay any extra interest on top of what you borrowed!

Where can you use credit cards?

You can use credit cards mostly anywhere! Some examples include grocery stores, clothing stores and gas stations. Just present it to the cashier during payment.

What are the benefits and costs of using credit cards?

Benefits:
  • Make large purchases now, pay them off later
  • Credit statement makes budgeting easier
  • Easier to carry around compared to a bunch of cash
  • You can build up your credit score (the sooner, the better!)


Costs:

  • Easily go into debt if you overuse the card and don't pay off your bills
  • The ease of using the card can lead you to overspending
  • Interests rates can build up and make a small debt larger over time
  • There is a limit to the amount of money you can use. This is called a credit limit.
  • There are many fees including penalty fees (if you don't pay on time), over-the-limit fees (if you go over your credit limit) and annual fees (fees you have to pay every year for owning the card)

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

Credit Card Tips

  • Don't overuse! Stick to your budget. Make sure to keep track of what you're spending, how much you owe and how much you will have to pay off in the end, including interest.
  • Be responsible! Having a credit card is better than not having one, but not having one is better than misusing one!
  • Do not miss payments! Pay your bill in full every month. You will end up in debt if you don't. (Don't spend more than you know you can handle.)
  • Make sure to log into your account to check your balance and to make sure your account hasn't been compromised (in other words, make sure there are no unauthorized purchases that you didn't make.
  • Take advantage of extra perks (some companies will offer things like free travel insurance, extended warranties, rental car coverage and more)

sources