What is Credit?
Credit is money you borrow to pay for things. It is usually referred to as a loan. You make a promise to pay back the money you borrowed plus some extra. The extra amount is part of the cost of borrowing money.
If you have a good credit record, it will be easier to borrow money in the future. Credit cards give you the ongoing ability to borrow money for household, family, and other personal expenses. Having a credit card does not mean you have the money to pay for a purchase. You need to be able to pay your monthly credit card bill.
If you have a good credit record, it will be easier to borrow money in the future. Credit cards give you the ongoing ability to borrow money for household, family, and other personal expenses. Having a credit card does not mean you have the money to pay for a purchase. You need to be able to pay your monthly credit card bill.
Why is Credit Important?
Credit can be useful in times of emergencies. It is sometimes more convenient and safer than carrying large amounts of cash. It allows you to make a large purchase, such as a car or a house, and pay for it over time. How you manage your credit and your repayment history can affect your ability to obtain employment, housing and insurance.
The Cost of Credit
When you obtain a loan, there are generally two costs you must pay: Fees and Interest.
Fees are charged by financial institutions for activities such as reviewing your loan application and servicing the account. Examples of fees include maintenance fees, service charges and late fees.
Interest is the amount of money a financial institution charges for letting you use its money. The rate of interest can be either fixed or variable.
Fixed rate means the interest rate stays the same throughout the term of the loan.
Variable rate means the interest rate might change during the loan term. The loan agreement will show the details of the rate changes. Credit terms can be confusing because of the various rates and fees lenders charge.
The Federal Truth in Lending Law requires banks to state charges in a clear and uniform manner so consumers can easily compare the actual cost of borrowing. Lenders must disclose the following:
Fees are charged by financial institutions for activities such as reviewing your loan application and servicing the account. Examples of fees include maintenance fees, service charges and late fees.
Interest is the amount of money a financial institution charges for letting you use its money. The rate of interest can be either fixed or variable.
Fixed rate means the interest rate stays the same throughout the term of the loan.
Variable rate means the interest rate might change during the loan term. The loan agreement will show the details of the rate changes. Credit terms can be confusing because of the various rates and fees lenders charge.
The Federal Truth in Lending Law requires banks to state charges in a clear and uniform manner so consumers can easily compare the actual cost of borrowing. Lenders must disclose the following:
- Amount financed
- Annual percentage rate (APR)
- Finance charge
- Total payments
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