Credit, when talking about money, is literally financial trustworthiness, i.e.: how much someone (or something) will trust you with borrowed money.

In this modern world there are two kinds of credit:

  • Item-based credit — these are usually fixed loans, such as a mortgage, personal, or car loans. They’re used to buy one specific item that you normally would not be able to simply write a check for (a house, a new kitchen, a car, etc…)
  • Revolving credit — these are your credit cards. They’re referred to as “revolving” because you have a fixed amount of money you can access that you can spend as you wish. Once you repay the debt owed you can use that credit again.

Credit is something that needs to be repaid, and the different kinds of credit are usually repaid differently.

Item-based credit, such as a loan, is usually repaid on a predetermined schedule, which is usually in approximately equal amounts. With this kind of repayment the company you borrowed from usually has a certain interest payment that needs to be made, which is agreed upon by the borrower and lender. This rate is how the lender makes a profit from lending money.

Revolving credit, such as a credit card, can usually be repaid on a monthly basis or on an “as needed” basis (as long as the minimum monthly payment is met). So, if you have $1,000 in credit, you spend $300, and repay only $100 you’ll have $800 in credit left with $200 left to pay. Again, the lenders charge an interest rate which they use to turn a profit on your credit.

Credit is the potential to put yourself in debt; however, it also allows you to become financially trustworthy. It can be good or bad, depending on how responsible and proactive you are with your finances.

[tags]credit, credit cards, fico, loans[/tags]