Credit

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What is Credit?

Credit refers to borrowed money. When you buy something now and promise to pay for it at some point in the future, you are using credit. As such, credit allows you to make a purchase without having the required cash in hand. Nonetheless, it should be understood that credit is not a substitute for cash, but a type of loan that must be paid back with future income.

Before being allowed to use credit, a lender must first be willing to trust that you can repay the amount of credit you use. Your financial trustworthiness is determined by a number of factors, the most commonly used of which is your credit history. This history details how you have used credit in the past and is reported in your credit report and credit score.

How does Credit Work?

To establish credit with a lender, you must first be willing to accept the lender's terms for using this credit. These terms include, but are not limited to, the annual fee, annual percentage rate, billing cycle, minimum payment, grace period, late fee and credit limit.

After accepting the specified terms and submitting an application, the lender will use identifying information, like your social security number, to scrutinize your credit history. If the lender determines that you are financially trustworthy, it will extend credit to you via a credit card or loan.

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