Borrowing Basics: An introduction to credit

Ailene Amaro
Feb 24, 2020
Borrowing Basics: An introduction to credit

Usually referred to as a loan, Credit is money you borrow from an institution to pay for things.

You make a promise to reimburse the borrowed money plus some extra. The additional amount is part of the borrowing money cost.

If you use credit carefully, you’ll find it quite useful. However, if you’re not careful about how you use your credit, it can cause you problems.

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How Credit Works

You must first apply to create credit with a financial institution. The lender will usually use identification data to look up your credit history with loan offices.

If the lender determines you are a trusted borrower, you will receive credit.

The lender will provide you with instructions or conditions for using your credit once you have been approved for credit. The conditions contain, but are not restricted to:

  • How much can you borrow?
  • How much is the cost of loan utilization?
  • Whether you can continue to use the same credit time and time again (a credit limit or credit line)
  • Whether you can borrow money just one time (a loan)
  • What happens if you pay late?
  • How often should you send loan payments?

More Benefits of Having Good Credit

Becoming creditworthy can make it a lot easier for you to access credit (borrowed money). You can also take advantage of:

  • Ideal interest rates, terms, and cost reduction for loans, credit cards, insurance, and other financial resources.
  • The ability to purchase a product that you would otherwise not be able to buy if you had to pay for it in advance.
  • Recordkeeping simplified with possibly just one monthly bill.
  • The peace of mind from having emergency funds for unexpected expenses.
  • The convenience and security of not being required to carry large amounts of cash.

Tips to Managing Credit Wisely

It’s not exactly difficult to maintain your creditworthiness; however, knowing the following tips may be useful:

  • Always pay your bills on time!
  • Limit the debt amount on your credit lines.
  • Limit the number of loan applications you apply for. Your credit score is affected by loan requests.
  • Pay your bills completely each month or pay more than the minimum payment if this is not feasible and, if necessary, apply additional payments to the largest interest rate debt.
  • Do not close all your current accounts or loan lines. Your credit score is affected by your existing credit history.
  • Check your loan report for mistakes, dispute any inaccuracies with the loan office, and avoid identity theft.
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