Using Credit

The Basics of Credit

Credit is the ability for consumers to purchase goods and services with borrowed money. In return the consumer will pay the payment in the future. Future repayments will usually have interest. Credit interest is an annual interest rate(APR). Thus, by using credit you are trading off the ability to spend in the future for spending at the moment.

In order to receive credit consumers must show their creditworthiness. Creditworthiness is the ability to repay a loan. It is based on the 3 C's of credit: character, capacity, and capital. The Credit Bureau, a company that collects information on consumer's credit and sells it to lenders, uses consumer's creditworthiness to assign a credit score. This score ranges from 500 to 850. The credit score and credit information of consumers is known as a credit report. This report can be requested by lenders.

There are two kinds of credit: personal loans and credit cards.

Vocabulary Watch

Credit Cards: What YOU Need to Know

Credit cards are plastic cards issued by lenders for holder to purchase goods and services in stores and online. In order to receive a credit card you must first apply for one. Many common credit cards are Visa, Discover, American Express, and Mastercard. Credit cards can be regular charge accounts or revolving charge accounts. Charge accounts mean consumers must pay their balance full each month. American Express is an example of a regular charge account. Revolving charge accounts allows consumers to carry their balance from month to month. Visa and Mastercard are an example of revolving charge accounts. Credit cards also have other interests. There are annual fees which require holders to pay a certain amount of money every year. There are interest rates(APR) which range from 0% to 29%. Credit limits is the maximum amount of money you can spend on the credit card. If the holder goes over their limit there can be a penalty fee or the card may be declined. Some companies will issue a fee of an extra $30 for each charge.

Although these fees may seem like a pitfall, credit cards have many benefits to holders and the economy. Credit cards increase the purchasing power of consumers, which means more goods and services can be bought. When more goods are being bought more jobs can be created. Then those people with job can purchase more goods. Some companies also have incentives for holders. They offer points, cash back, and airlines miles.

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

To control credit card tasks consumers should think carefully when they are using their credit cards. Consumers should consider what is the best credit card option. It should be the least expensive and offer the most benefits. Consumers should also pay their credit card balance in full to avoid minimum payment traps. When making a purchase consumer should ask themselves if they really need to pay with a credit card. If they can pay in cash then they should. In some cases, consumers should take out a loan rather than using their credit card because the loan may have a lower interest rate. Other tips for consumers is to pay their bills on time, avoid having too many cards, read contracts, avoid identity theft, and seek credit counseling if needed.