Credit as a powerful tool. It gives you buying power, but without undestanding how to use credit correctly, the use of a credit card in the wrong hands can be addicting. It makes going to the store dangerous.

It’s so important to undertsand how credit works, what credit is and how to manage credit as a part of a financial lifestyle. Making credit mistakes is easy – mistakes that in the end could cost you money each month.
 
No matter where you are in your financial journey, it is never to late to begin to learn more about credit, it’s use and how you can improve your management of it.

Introduction to Credit

Some of us remember when paying at the checkout involved pulling out cash or writing a check. For more recent generations paying with a credit or debit card is what they know. Credit cards and their widespread use has only been popular since around the mid 1970’s.

When the credit card actually came into use does not matter. Those numerous small pieces of magic plastic tucked away in our wallet meant to us we could get anything we wanted – it was a substitute for cold hard cash. The fact is credit cards are not a substitute for cash – but a loan. It’s a loan you must pay back.

Credit – What Is It?

When you purchase anything on credit you are making a promise. It’s a promise of buy it today – pay for it tomorrow. Credit and access to it allows you to buy things when you do not have the cash available.

Read that statement again – It is key to learning and understanding how you use and control credit in your life.

"Credit and access to it allows you to buy things when you do not have the cash available."

Before a credit card company, bank or any kind of financial lender will allow you to tap into the wonder of credit, they first need to determine if you are a trusted party. A party who will repay the money or credit they have extended to you. They determine if you are “financially trustworthy.”

The financial community uses a variety of factors to make this determination. The most popular tool of factor is your credit report. A credit report is your “credit history” on how you have used credit in the past.

Lenders consider your history of credit to be a very good and clear indicator of how you will use credit in the future. Your credit report will include your past credit history and your current credit score.

For individuals starting to establish credit or have no credit history built yet, may find the lender looking at salary and how long you’ve been employed at a company. Lenders could ask someone with good established credit to to co-sign with you. This means both parties would be responsible for the credit.

How Does Credit Work?

To establish some form of credit along with a credit limit you’ll first need fill out an application to apply for a loan, credit card or whatever. The lender will take the information on the application do some research on your credit worthiness. Using your social security number they should be able to review your credit report and history.

Once they gather the information they can make a determination on your trustworthiness as a borrower. Once approved the lender will decide how much credit to extend and terms like interest rate, payment schedule, late fees and any other cost associated with using the credit.

Lenders usually set a maximum credit limit you can access all based on your credit history. If you exceed the credit limits in most cases a monetary penalty is accessed.

Once credit has been extended lenders will provide billing statements detailing:

• Purchases made
• Payments or credits
• Interest charged
• Late payment charges
• Minimum payment to be made
• Due date of payment

Credit is a big part of most of our lives. Knowing how it works, how you can build and maintain a good credit rating and how to use credit wisely is all a part of your finacial health.

How’s Your Credit Health?