Learn: What is credit?
Learn: What is credit?: Before you get a credit card, learn what credit is and what it can do to help or harm you.
What happens when you buy something with credit? What are you really doing?
When you buy something using credit, you are buying an item now and paying for it later. In other words, someone else - a bank, or a credit card company backed by a bank - is paying for what you bought. Your responsibility is to pay that someone back. The most common way to use credit, if you are a consumer, is with a credit card.
Credit is commonly used if a person wants to buy something and doesn’t have the cash to pay for it. You can buy an item as long as it costs less than the credit line you have been given, which is how much credit you are allowed spend in a given month. By using credit, you are having a bank pay for your purchase. You get the purchase right away, just like you would if you paid for it in cash, but you still owe money for what you bought. You are responsible to pay the full amount of your purchase back to the bank, plus a monthly fee called interest.
Interest is calculated every month based on a rate (called APR - the Annual Percentage Rate) that is predetermined to be fixed (always the same) or variable (could change from month to month). For example, if you buy a $100 microwave using your credit card, and the fixed APR that your credit card features is 18%, you will owe $18 of interest after one year if you never make any payments. However, most credit card companies require that you pay a minimum balance every month - usually around $25 - and will penalize you with a fee or with higher interests rates if you do not comply.
Depending on your credit history - if and how you’ve used credit in the past - a credit company will give you more or less freedom to spend money using credit. If you have never used credit, or have used credit and didn’t follow the guidelines of the credit card company (i.e. didn’t pay the minimum balance every month), you will not be eligible for the same cards that people who have used credit and followed the guidelines of their credit card company. If you are new to credit or had credit problems in the past, you have bad or fair credit. If you have used credit responsibly, you have good or perfect credit.
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