Credit

The Basics and What You Need to Know

By: Bridget Bieschke

The Basics

The question most commonly asked is "What Is Credit?". Credit is your "financial trustworthiness"/Creditworthiness or your ability to obtain a credit card, a loan, etc. There are two types of credit you can obtain: a credit card or a loan. A credit card is a card obtained from a store or a bank that you can use to buy the things you need, and then later at the end of the month receive a bill of those payments. A loan or personal loan is a sum amount of money that you borrow from your bank for things like a student loan, car, or down payment for a home. The way that determines if you receive credit or not is from a few things: your credit score which is the score you receive for your creditworthiness and your character, capacity, and capital or your payment history, your ability to pay your bills and the amount of money you have. You can obtain your credit score from one of the credit bureaus and they will send you a copy of your credit report. Your lender will use your credit score/credit report to determine if you can obtain credit. Once you receive the clearance for obtaining credit, you will be give an APR or Annual Percentage Rate (Interest). Your interest rate is determined by your credit score, if you have a lower credit score you will have a higher interest rate and if you have a higher credit score you will have a lower interest rate. Even though all of these things sound easy and affordable there are some costs that come with credit. You may have fees for opening a credit card account, fees for late payments, and fees for not paying your bills at all. If you fail to pay your bill or have a late payment, your interest rate will increase and make your credit score a lot lower. You have to know all the costs and benefits of opening a credit card or taking out a loan before you do so, so you can help build good credit.

Need To Know: Vocabulary

Annual Fees - an amount of money payed each year for membership


Credit Limit - the maximum amount of money a credit lender or a financial institution will extend

to a client


Penalty Fees - an amount of payed for a late payment or going over the credit limit


Credit Cards: What You Need to Know

A credit card is a card from a store or a bank that you can use to make purchases and receive a bill at the end of the month for the charges you've made. You can use these credit cards wherever credit cards are accepted, for example the grocery store, the mall, or the amusement park. There are some benefits of using credit. Some of these benefits are cash back, low APR, no fee to join, and having a credit card helps you build your personal credit for the future. Along with the benefits there is also some disadvantages. Some of the disadvantages are late fees, return fees, and if you do not keep up with your payments there is a possibility of ruining your credit in the future.

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

When obtaining or using a credit card you have to think about all the costs and benefits before making a binding decision. You should consider how much money you are willing to pay each month and how much money you actually have right now. You will want to choose the credit card with the most benefits for you. This credit card should have a low interest rate and APR, and flexibility. Each month you will get a bill for the purchases you've made. In order to build good credit do not pay the entire bill but a little more than half of bill so that the company sees your credit trustworthiness. This method should not be used for everything, if you have the money to pay a big ticket item off, do it otherwise if you make a late payment you could potentially ruin your credit and be charged a late fee or penalty.