CREDIT 101

Do you recall as a child how fascinating it was to watch someone buy something with a credit card? Credit cards were like magic; pieces of plastic that worked like money. In case you have not learned yet, credit cards are not a substitute for cash, but instead a loan that you are obligated to pay off with your future earnings.

What is Credit?
Every time you decide to buy something with the intent of paying for it in the future, you are utilizing credit. Having credit enables you to make purchases during times when money is not available to you. Prior to a lender issuing you any sort of credit, they must first decide whether or not you can be trusted to pay-back the total credit that you use.  This is measured as your financial reliability.

There are a few key variables lenders utilize when determining your financial reliability. How you have previously used your credit, known as your credit history, is the most common. Analyzing your past credit history is the best way for lenders to foresee how you will use credit in the future. Credit reports and scores are developed based on your credit history. Learn more about how credit scores are computed.

As an individual with no credit history, lenders will typically use additional factors like your employment and salary history to estimate your financial reliability. Or, lenders may necessitate that someone with a favorable credit rating be a co-signer for you.

How Does Credit Work?
If you are looking to get credit with a bank or a lender, you will need to fill out and remit an application. Your identifying information, i.e. social security number, will be used to access your credit history. You will be granted credit if the lender concludes that you are a dependable borrower.

You will receive terms for utilizing credit once you are approved. These terms will typically include interest rates, frequency of payments needed by you and what the penalties are for not paying on time. Also, your lender will institute a limit on the total amount of credit that can be used at one time. The basis of this amount will be your past credit history. If you do not pay on time, or exceed your limit, you will be hit with a monetary penalty and/or higher interest rates.

Your lender will provide you with a means for using your credit. This will be either a credit card or a check book. Every month you will receive a billing statement that will include all of your account activity (details of your purchases, costs, minimum amount due and the due date). As mentioned, you must pay timely and in full every month to avoid any sort of penalties.

Now that you have received a firm breakdown all about credit, you are prepped to learn about the importance of credit, re-establishing credit and how to build a strong credit rating.

Related Reading:
Getting Credit with a Secured Credit Card
Mortgages to Rebuild Credit
Personal Loans for People with Bad Credit
Surviving a Slow Economy
Credit for Those Under 21
    --How to Teach My Child About Credit
How Credit Scores Work
Your Financial Report Card

 



 

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