Credit is money that you can borrow with the promise to repay it at a later date.
Credit is not free. It allows you to borrow money when you don’t have cash, but you may be charged interest and fees. There are two main types of credit: Installment Credit and Revolving Credit.
|Installment Credit||Revolving Credit|
|This is credit that you use to borrow money and promise to repay in equal amounts over a specific period of time.||This is credit that allows you to borrow a pre-established amount over and over again, as long as your account is in good standing. Each month, you repay the amount borrowed in-full or you make a partial payment.|
|Example of installment credit:|
Hilary signs an auto loan in which the agreement requires that she pays the lender $350 each month for six years.
|Example of revolving credit:|
Max signs up for a credit card. He is given a card that will allow him to borrow up to $500.
He uses the card to make purchases that total $125. Now he only has $375 credit left.
At the end of the month, Max receives his statement.
Good credit is necessary if you plan to make a major purchase and have to borrow the money. You need to establish good credit. Good credit means that you pay your bills on time and you don’t have too much debt. The importance of good credit also goes beyond purchases. It also means that you will be able to do things like rent an apartment in your own name, have a cell phone, or pay lower insurance rates. It may even help with getting a job because some employers will ask to check your credit score before deciding to hire you.
There are several ways you can establish credit. You need to show potential lenders that you will be responsible for paying back a loan in the time period that you said you would. How can you do this?
Here are some ideas for how to prepare for unexpected expenses: