What is your credit?

You’ve probably heard of credit. It’s likely that you even already use it in the form of a “credit card.” But what is credit exactly?

Credit is simply how we borrow money to spend on goods or services now, with the understanding that we will pay this money back in the future.

What are typical uses of credit?

If you use a credit card to buy gas for your car, you’re using credit.

If you open a line of credit with a bank to fund a major purchase like furniture or a home appliance, you’re using credit.

If you take out an installment loan from a lender to help pay a medical bill, you’re using credit.

If you sign up for a new credit card to access certain rewards like airline miles or points you can use at major retailers, you’re using credit.

Credit allows us to make purchases now, even if we don’t have the ability to pay for the full total of the expense at the moment. You’re essentially borrowing money (that you’ll pay back in the future) to make purchases now.

But borrowing money isn’t free. If you’re borrowing from a traditional bank, credit card company or lender, you’ll have to pay a cost for the privilege of borrowing that money. That cost is called interest.

That’s why it’s so important to understand your credit. If you use credit correctly, you can qualify for lower-interest rates and create more opportunities to improve your quality of life

If you use credit incorrectly, interest charges can pile up and quickly spiral out of control. Mismanaging credit hurts your finances and holds your life back.

So, let’s understand credit as a concept.

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