Credit in a way is a bank or lender saying to you that “We trust you…” Why? In order for you to be able to receive credit, you need to prove your credit worthiness. If you are credit worthy, then a credit card bank or lender will issue you some credit. Credit permits you to buy something today, even though you don’t have the cash today. When you accept the credit, you promise to pay back the creditor or lender at a future date. The more credit you use, the more debt you incur. Credit can help you purchase a good or service NOW versus later.
For example: You are 20 years old, you have a full time job and you want to purchase a big screen tv for your super bowl party.. You don’t have the $500 in cash as of now, but you saw a special promo at the electronics store that said if you apply for a credit credit card, you would receive 10% off of your first purchase. Well, heck, that’s $50 off! That kind of makes sense right? It all depends on how long you take to pay off that credit card, if you even get it. So you apply for the credit card and they issue you a credit card with a unsecured credit limit of $2500! You use the store credit card and buy the tv. This is an example of how credit can help you. it enabled you to buy the TV now, before the party, rather than a few months from now, after the party! Just don’t forget to pay off the credit card!
What Types of Credit Are Available?
Banks and Lending institutions offer two types of credit: Secured and Unsecured Credit.
Secured Credit
Secured Credit requires some type of security deposit.
A Secured Credit would require you, the consumer, to deposit collateral in the form of cash into the bank account connected to that secured credit card. The deposit would be your credit limit, thus eliminating a lot of risk that a unsecured credit card would give to the bank.
If you are applying for an auto loan, the auto lender would ask you to use the car as collateral for the loan, this way if you do not pay the loan, they an take the car back.
If you are trying to purchase a house, that us also a form of secured credit because the mortgage that you would have requires you to put the property you are buying as collateral.
Unsecured Credit
Now, unsecured credit is more risk to the bank. For this reason, you would need to have some type of positive credit history in most case to be able to qualify for unsecured credit, such as a regular unsecured credit card. NO COLLATERAL REQUIRED!
In summary...
If you would like to be able to get a credit card, personal loan, auto loan, or mortgage in the future, then you should work on building a positive credit history sooner than later! This will not only give you the ability to purchase things you want on credit, but it will save you money in the long run, because the better your credit score is, the lower the interest the bank will typically charge you! You can learn more on how to build credit here: How do I build credit?
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