What it is and how to use it
The Basics of Credit
There are two forms of using credit: Credit cards and loans. Credit cards are what many people use to buy things that they don't have the money for. Most people can apply for a credit card, but more on that later. The other form of credit is through loans, whether they're personal or business. A personal loan is borrowing money from a lender, usually a bank, in order to buy a house or a car, and once the bank pays for that item or product, you pay the bank a payment monthly to pay them back for the loan. A business loan is a loan that the bank would give you if you needed funds to start up a business or some would even consider college loans a business loan because it's investing for an education that would help pay off the loan in the future.
Loans aren't easy to get, however. A bank looks at a few things to know whether or not somebody can handle a loan, thanks to the help of credit bureaus. A credit bureau is a company that keeps track of the financial history, or credit report, of individuals. They know when people are late on payments, their law history, and their all-around spending record. People are assigned a credit score between 300-850 to let banks and other lenders know how reliable of a person you are and how likely it is that you will pay back your loans and pay them back on time. Where you fall on the credit score spectrum is also known as your creditworthiness, and it helps lenders determine how much they can lend you, what APR to give, etc. Based off this information, a bank will give you an APR, which is an interest rate paid annually on a loan of any kind.
Creditworthiness is a rating or an assessment of how "worthy" somebody is of receiving "credit", whether it be in the form of a personal loan, a business loan, or a card. Credit bureaus look at credit history to assign a credit score from 300-850 that helps banks and lenders determine whether they give a loan or not.
APR stands for Annual Percentage Rate and it is an interest rate on a loan taken out. APR is another thing determined by credit score and creditworthiness, the lower your score, the higher your rate. The higher your score, the lower your rate.
A loan is money that the bank gives you to spend on something, and then you pay back the bank the money. Loans can be for personal use, so to buy a house or a car or a college education, or loans can be for business where the bank gives somebody some start-up money and once their business starts making profit then they can payoff their loans.
Credit Cards: What YOU Need to Know
Many cards have an annual fee that you have to pay every year for credit card services. That's one way they make money, another way being through interest rates. Credit card companies charge you interest for all the money you borrow from them, however most offer the first few months with card at 0% APR. Credit limit is when you've spent as much money as the company will let you borrow from them, and many will fine you for it, otherwise know as an over the limit fee. Other penalty fees include late fees for paying bills later than the deadline, however many cards offer a grace period where you can pay bills after the deadline for no fee if paid before the end of this period.
Smart Consumers: Don't Fall Into the Credit Card Trap
- Don't buy everything with your credit card. Sometimes use cash or your debit card.
- Pay your bills on time. Not only will you be charged late fees for missing payments, but credit bureaus know when you miss payments and it only lowers your credit score.
- The more you spend with your credit card, the more you have to pay back, and the more you'll be paying because of interest.