I have a younger sister. She’s 16. She told me what’s credit?
I’ve ran across online the perfect definition of the term ‘credit’. It read, Credit = Confidence in the borrower’s ability and intention to repay’.
We all don’t have cash to pay outright on certain huge expenses such as a house, car, boat, high expenses such as those. Things ranging from a few thousand up to hundreds of thousands of dollars.
You want a house. It’ cost $120,000. All you have $10,000. What do you do?
This is where credit comes in.
Banks will say “So you want that house. We have the money you can borrow”. This is credit. Now it’s not that easy. Banks will loan you the money based off your income, past history of credit loans/credit cards (if any) and so on.
But the example above is pretty much how credit comes into play. When you do not have enough money, credit will help you obtain them.
Responsibility.
My friend comes to me and ask to borrow a $100 and will pay it back on his next payday. I trust that he’ll pay me back and not run away and forget to pay me.
Many do this with a credit card or a loan they get. Almost thinking it’s free money when they get a loan or credit card. It’s not. Banks aren’t in business by doing that. This is where it’s your responsibility to pay back credit loans. If not, any future of getting a new car , new house, business loan could be affected.
It’s good to understand how credit works, in general, how anythings works that way we have a better understand of it’s purpose. I think examples are great in teaching so I’ll give you another one on not being responsible with credit and how it can hurt you.
Not paying back on time, not paying at all, not paying the required amount that the bank ask for each month could hurt your credit score and affect any future purchases.
A credit score is a number the banks give us ranging from as low as 500 to as high as 800. A person with a low credit score such as 500 means this person isn’t a good borrower. The higher the better. A credit score is basically a past history report or like a report card we got in school. It says either this person is a trusted borrower and will pay us back or either this person has bad history on paying things back.
If you were a bank. You have 2 persons walk in wanting to get a loan for a new car. They both needed $10,000.
Person A had a 750 credit score. His history showed he payed on time every time. His credit cards were all being paid on time each month.
Person B had a 590 credit score. He was late a few months on payments. It showed he didn’t pay fully a previous loan from another bank.
Who would you approve and trust to give out the loan?
