What is Credit and How Does it Work?
Credit is defined as “the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.” from Oxford. These days credit is in the form of a lender, typically a bank, which lends money to a consumer, or company, to purchase goods or services. The consumer, in this case, is responsible for paying the lender back. This line of credit typically has a specified interest rate. There are two parts when you go to pay off a credit card bill for example. The Principal, or the initial charges, and The Interest, the lender’s return on the money you borrowed.
To the everyday person credit is “borrowing money that has to be paid back with interest” states Jenny McCann, a Marketing Specialist with Empower Brokerage. While she has the fundamentals of how credit is used – she like most Americans are missing a key factor. Banks lend consumers money based on their credibility. The lower your credit score, the newer your credit score. The less money a bank is willing to lend you. This means that avoiding credit card debt and avoiding splurging when you have low credit limits is more important than ever.
Why am I charged interest on my line of credit?
You are only charged interest if you purchase anything on the credit card or take out a loan. The interest on a credit card is typically anywhere from 12-22%. Depending on what your credit score is. Your credit score is based on many different factors, we cover your credit score and how it can be affected in this article.
Why is it called “Line of Credit”
A line of credit often refers to multiple sources of credit taken out. This could include a credit card, a loan, student loans, a mortgage, and even an auto loan. Now that you have a better understand of what credit is and what it all covers, let’s get into the inner workings of how it works.
How does Credit Work?
As we covered in the first paragraph, a lender will give you a set amount of money or a set limit on a credit card that you can spend however you see fit. However, you still have to pay back the money that you borrowed.
What are some good credit cards?
Credit cards are very subjective. It really depends on what you want, cash back, travel points, or something else. In this case, you want to try and find a card with the lowest annual fee (if any) and the highest points. However, there are times when it can be beneficial to get cards with an annual fee. Some of these cards have airport lounge access, and some even have a $300 travel credit annually. Benefits alone can make a card well worth the expense. Because these cards change so frequently you’re best bet is going to be doing your research. Compare cards from different banks and find what works best for you.
Life Insurance Questions?
We hope that this information on lines of credit is useful to you.
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