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What is Credit?
What is Credit?
Credit is the ability to borrow money and pay it back later. When you buy something "on credit", you are expected to pack back the amount you spent, sometimes with interest.
⭐️ Key Term - Interest: An additional amount of money paid back for using someone else's money
Example: 7.5% Interest on a $10,000 loan for you car would mean you would have to pay back $750 (0.075 x 10000) on top of the $10,000 you borrowed.
So why does credit matter, and what are some advantages of using it?
So why does credit matter, and what are some advantages of using it?
Using credit can be useful when you are making large purchases, such as buying a house or a car.
It can also build financial trust, and give you access to better opportunites in the future.
But what exactly are these opportunities?
To learn more, let's take a step into the time machine for a brief history lesson.
📍Early 1900s: The First Credit Cards are Introduced:
Big Department stores like Sears created their own credit cards, which allowed families to buy products and pay later
📍1950s: The Credit Card is Born:
The Diners Club Card, followed closely by the Bank of America card which eventually became Visa and Mastercard, became the first card accepted at multiple businesses
The FICO credit score ranges from 300-850.
📍1989: The Introduction of the FICO Score:
The FICO score is a credit score which basically tells creditors how "worthy" you are of recieving a loan, and how likely you are to pay your money back on time. The FICO score turned your borrowing history into a single number, making lending more consistent.
Your credit score (FICO) is one of the most important steps towards financial success. The higher your credit score is, the more likely you are to receive approval for loans, while also having lower interest payments on them.
But How Can I Raise My Credit Score, And Keep It High?
But How Can I Raise My Credit Score, And Keep It High?
Pay Bills On Time - Shows that you are financially responsible
Keep Balances Low - Ensures you won't have to pay more money than you can handle at the end of the monthly cycle
Avoid Borrowing More Than You Can Repay - Leads to the buildup of debt, trapping you in an endless hole; One of the most common ways people end up trapped in debt
Use Credit Consistently, but Carefully: Builds your score while also making sure that you are not overspending
Summary: While credit is a great tool for making expensive purchases and building your reputation financially, it also comes with the risk of high interest and debt. Managing your payments and avoiding debt is essential to living successfully from a financial standpoint.
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