What Is Credit?

You have just received a pre-approved credit card in the mail with a credit limit of $1,000. Now you can go buy that DVD system or the new clothes you've been wanting. But wait! Is this money really yours? What will it cost you to use this money?

Generally, credit is a loan. The loan can be in the form of a mortgage, a credit card, or a simple five-dollar loan from a friend. Credit normally comes with interest attached that provides the creditor with the incentive to loan money.

Creditors may be individuals, banks, or businesses. They loan money to people they believe will repay debt. They look at a characteristics of the applicant to determine if they should extend credit and usually check with credit bureaus that track the borrower's history of repaying loans.

What characteristics do you think creditors look for?

Click here to see a list of the characteristics.

The most common and widely used form of credit is the credit card. A credit card is a form of borrowing that usually involves interest (or finance charges) on the money loaned.

Credit cards are issued through a variety of providers, including banks, credit unions, department stores, and many businesses.

Here are a few tips to help you use credit cards wisely:

• Don't spend what you can't repay. Using a credit card is borrowing money and paying it back with interest. Because you're not using cash from your wallet, it's important to keep track of what you've charged to your credit card. It's best to charge only what you know you can pay back each month.



• Shop around for interest rates. Credit card companies offer a variety of interest rates. Shop around for the lowest interest or annual percentage rate.



• Be aware of your spending and payment history. Credit bureaus track your credit history. They document whether you pay your bills on time and whether you at least pay the minimum amount due. A bad credit report can affect your ability to borrow in the future for things like a car, a house, or even your college education.

For more information about credit, visit the Credit Card Shopping and Understanding Your Credit Card Statement sections of this activity.