Credit Basics

The Difference between Credit and Debt

What is the difference between credit and debt?  Credit is your ability to borrow money from a lender.  Debt is the money that you borrow and must repay.  For example, you may have a credit card with a credit line of $500. If you use it to make a $50 purchase, you now have $50 of debt and $450 in credit.  If you take a $600 loan, you have $600 of debt. Credit and debt are linked in another way. If you use credit and then repay your debt on time, lenders will be willing to give you better terms and possibly more credit.

Costs of a Using Credit Poorly: Its Longterm Effects

When you receive a credit card or take out a loan, you have agreed to a series of terms including how much interest you will pay and how much you will repay at predetermined times. If you pay late or if you fail to pay at all, there is a much greater impact to your credit than additional fees alone.

How Choices with Credit Effect You

You Need Credit to Establish Credit

The use of credit is not a bad thing - the wise use of credit is what matters. In order to qualify for credit - you actually need to have a credit history.  Therefore it is important to manage and maintain your credit wisely. In the following video tips are provided on how to establish good credit within 6 months to a year.

Why and How to Build a Credit History.

To Establish Credit

Establishing credit in your own for the first time can be difficult. There are several possible ways to go about it. First, you could apply for a credit card at a department or specialy store. These are usually easier to obtain, but higher in interest, than a card from a financial institution.

You could apply for a bank loan or card that is secured by money you have on deposit with the bank. You would establish a credit history by charging and paying off your bill without resorting to the money you are using to secure the credit.

You could also ask a family member or friend to co-sign a loan for you. This does mean that in the event that you are not able to make the payments your cosigner will be required to make them.

Reasons for Being Denied for Credit

W hen a credit card issuer, bank, or other lender is considering your credit application, they use various factors to decide whether or not to give you credit. Creditors obtain this information from several sources including your credit application and your credit report.  There are three main areas they look at to determine whether or not to lend you money:  character, capacity and collateral.

Character

Creditors assess your personal character in being able to repay the amount you owe.  They consider whether or not you will be responsible, you will make the payments on time, review how long you've worked at your current job, how long you've lived at your current address, review your credit history and how you've handled credit in the past.

Capacity

Capacity is the term to describe whether or not you have the ability to take on credit, in addition to your regular expenses, such as food, gas, housing, etc.  Lenders also consider how many other payment responsibilities you have, whether you have a steady source of income, how many dependents you have and whether or not you pay child support.

Collateral

Collateral is a type of guarantee ( an asset) that the lender uses in case you don't repay what you owe.  A typical scenario is when you borrow money to buy a house, and you don't make your payments, then the house becomes the property of the lender, (typically a bank).  Other assets can include a savings or checking account, car, jewelry or even an art collection.

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References:

• Interview with Lori Jankalski. Consumer Credit Union of MD and DE, Inc. Interviewed on August 24, 2009.
• The City of New York, Department of Consumer Affairs, Office of Financial Empowerment. (2009). Get Credit Debt Help. Retrieved August 15, 2009, from http://www.nyc.gov/html/ofe/html/help/help.shtml

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