Have you ever dreamed of buying your own home, or perhaps starting your own business, but wondered how you can afford it? The answer lies in understanding and utilizing credit.
In the world of personal finance, credit could be used in a variety of ways. Credit may be used while financing a home or a car. It may even be used for education, emergency funds, day-to-day purchases, business investments, and much more. But what does credit really mean and why is it so frequently used during these purchases?
Understanding Credit
Credit allows consumers to obtain goods and services prior to paying for them based on the trust that the payment will be repaid in the future with extra costs, such as interest or fees. The ability to use credit, along with the costs associated with the borrowing is often determined by your credit score (which we will get into later).
Credit is built on a complex ecosystem that isn’t just about borrowing money and paying it back. From the terms and conditions of the loan to the interest rates on your credit, a numerous amount of financial decisions often dictate the opportunities available to you.
There are also different types of credit as well. Such as
Revolving Credit: Credit cards and home equity lines of credit (HELOCs)
Installment Credit: Mortgages, auto loans, student loans, and personal loans
Open Credit: Charge cards and utility credit accounts
Secured Credit: Credit cards with a deposit
Unsecured Credit: Credit cards without a deposit
Payday Loans: Cash advance loans
Cash Advances: Credit card cash advances, merchant cash advances
Peer to Peer Loans (P2P loans): Loans obtained through P2P lending websites
Line of Credit: Personal Line of Credit: For individual use
Business Line of Credit: Specifically for business expenses
Bridge Loans: Real estate bridge loans
Consolidation Loans: Debt consolidation loans
Merchant Cash Advances (MCA loans): Advances against future credit card sales
Microloans: Loans from microfinance institutions
Buy Now, Pay Later (BNPL): Online retail offers
Special Purpose Credits: Educational Loans
Which is too long of an explanation here but we will have another blog to go more in depth.
Definition of credit: Credit is the ability of the consumer to acquire goods or services prior to payment with the faith that the payment will be made in the future. In most cases, there is a charge for borrowing, and these come in the form of fees and/or interest.
https://financialaid.berkeley.edu/financial-literacy-and-resources/understanding-credit/#:~:text=Credit%20is%20the%20ability%20of,of%20fees%20and/or%20interest.
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The Power of Your Credit Score
Your credit score is the gateway to your creditworthiness. This score is measured by your financial reliability, inspired by these terms in which was offered to you. This score can range from 350-850, the higher the better, which basically summarizes the trust factor allowing the bank to determine weather you are eligible for the credit you are applying for.
Your credit score will affect more than just your ability to borrow money and pay it back. It will influence the terms of credit, such as interest rates and fees, the more favorable your score is, will effect your loan amounts as well. Essentially, a strong credit score will help you save money and open doors for various financial opportunities.
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Why Credit Matters
As mentioned earlier, credit can be used for a variety of reasons. If you plan to make big moves, you are more than likely to need credit. Other than the reasons stated above, some jobs may even need to check your credit scores in order to be hired. Even be landlords that want to rent out a property will check a tenants credit score.
Moreover, credit is more than just tool for building wealth; by understanding and managing your credit wisely is utmost important. This means when using credit be sure to keep your debt levels low, and pay them back on time responsibly to get the key of empowerment upon your credit!