Credit is a contract agreement that allows individuals, businesses and governmental agencies to buy goods and services now, and pay for them later. Wise use of credit can increase your ability to buy necessities and luxuries. Unwise use of credit can negatively affect your life and lead to financial problems . Creditors lend to people who are creditworthy and earn good credit scores (ratings). A credit rating is an assessment of an individual's ability and willingness to repay debts.
Who collects and evaluates this information? Organizations called credit bureaus collect information about the financial and credit transactions of consumers (you). There are three major national credit bureaus: Equifax; Experian; and TransUnion, LLC. When this information is collected over the years, this record becomes your credit history. For each individual, it includes every credit account ever opened, outstanding balances on current accounts, late or delinquent payments, bankruptcies and overdue taxes. Businesses notify the credit reporting agencies when a consumer opens a new account, closes an account, or skips/makes a late payment.
,Remember, a good credit report helps an individual to obtain credit from reputable businesses, and avoid easy-access credit traps. One such credit-trap is Predatory Lending. This is a policy of making loans to high-risk borrowers who are unlikely to be able to repay. Predatory lenders prey on senior citizens, low-income individuals, and others who lack financial knowledge. These loans can be payday loans, mortgages, or other consumer credit. The interest rates are very very high AND may increase over the life of the loan, causing the monthly payment to increase substantially each month.
Interest is the amount that is paid for using money. When money is deposited into a bank, the bank pays the depositor interest. The bank then takes that money and loans it to other consumers, Those who borrow that money pay the bank interest for using that money. There are two types of interest: simple and compound. Simple interest is earned only on the principal. The principal does not include earned interest. The formula is based on the principal, interest rate and time the money will be on deposit. The formula is: P x R x T = Interest. And of course, then the amount of interest is added to the principal.
Banks and credit unions issue various types of cards to account holders. The two basic types of bank cards are debit cards and credit cards. Debit cards are usually issued automatically to checking account customers but to get a credit card, an application has to be completed to assess your creditworthiness. Not everyone will be approved for the same bank cards or rates.
A debit card allows you to electronically access funds in an account at an ATM, or pay for goods/services from a business. Using a debit card has the same result as writing a check because the amount of purchase comes directly from the checking account (the deductions are almost immediate). There are also cards called dual-purpose debit cards that can be used for credit purposes as well.
A credit card allows the holder to make credit purchases (buy now, pay later) up to an authorized amount. Unlike debit cards, money does't come directly out of a checking account when a purchase is made. Instead, monthly payments are made based on the balance of the account. Interest is charged on the average unpaid monthly balance for all credit cards.
Gen Z, because of their comfort level with technology, seems to prefer digital payment methods: mobile wallets (Apple Pay, Google Pay); peer-to-peer payments apps (Venmo); Buy Now Pay Later (BNPL) services; and contactless payments.