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What is Credit?

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  • Written By: Sheri Cyprus
  • Edited By: Bronwyn Harris
  • Last Modified Date: 05 November 2016
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    Conjecture Corporation
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Credit is borrowed money that you can use to purchase things you need when you need them and then repay the funds back at an agreed on time. Services can also be paid for this way, such as cable and telephone services. For example, if you use telephone or cable services for a month or two and then pay for them at the end of that period, you are receiving services on credit. Common types include mortgages or home loans as well as personal loans or lines of credit.

A personal line of credit allows you to have money available when you need it. This often has a low interest rate, and the borrower can choose to use the entire limit at once or use it in smaller increments. This can be perfect for meeting ongoing money needs such as renovating your home. A personal line of credit for an approved amount means that you do not have to keep going back to the back for approval for each small amount you want to borrow.

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Credit cards allow a constant line of credit to spend and be paid off regularly. You usually do not have to pay any interest as long as you pay the full amount by each due date. Before you spend using a credit card, you should be sure you can repay the amount on time, as some can have very high interest rates. Mortgages allow you to buy a house and then pay back the amount owing at regular intervals. Mortgage payments may vary in the amounts per payment. There are many different kinds of mortgages available with varying types of repayment plans.

Repayment is an important part of the credit process. A good credit history means honoring repayment agreements. If not, your credit rating may be damaged and you may not be able to borrow money again when you need it. Some loans allow you to repay faster than the agreement without penalty, while others do not.

If you are slow in repayment you may also have to pay a high interest rate. Lenders need to charge interest to borrowers in order to make a profit on their investment and to help them account for the risk of losing their money when borrowers do not repay the money. You should always consider the interest rate and repayment schedule before you agree to a loan. Be sure that you will be able to repay it. Think about situations such as if you lost your job suddenly and would not be able to meet the payments. If there is any risk that you would not be able to make the regular payments, you should definitely postpone applying for credit.

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Discuss this Article

anon100470
Post 3

I need to know more information about credit control.

sammyG
Post 2

I think we as Americans need to put our use of credit in check with the reality of our financial situation. The regulation of credit markets needs more oversight and I think it is the government's responsibility to provide consumers with protection from banking organizations that are lending to under-qualified patrons. At the same time, consumers and credit borrowers must be responsible for the money they borrow.

bbpuff
Post 1

It’s important to really understand what makes up good credit and while there is a lot of information out there, it’s just one main thing that creditors seem to gravitate towards the most when it comes to your overall credit score: payment history. While revolving credit and open accounts/delinquent accounts are taken into consideration, it’s the consistently late payments on your credit cards, mortgage loan, car note, and what have you that will really put a dent in your credit.

It’s important to understand this even before you are of legal age so that you can keep your credit in good health all throughout your life.

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