What is credit?

Your coaches explain the idea of credit.

MichaelWant to hear some good news? If you do a careful job of managing your money over time, you’ll gain the ability to borrow money when you need it. This ability to borrow money is called having credit. In this lesson, we’ll start at the beginning and cover the basics. Plus, we’ll show you how to use credit to your advantage.

LuisSo, let’s get started! There are lots of situations where people borrow money: Car loans, credit cards, student loans, and home mortgages are all examples of credit. In each case, you’re borrowing money from a lender with a promise to pay it back.

MichaelBanks and other businesses will lend you money, but only if they have trust and confidence that you’re able to pay it back. Earning this trust is called establishing credit. Those who lend you money are called lenders or creditors. The money you owe is called debt.

LuisThe money you borrow is yours to spend, but remember: when you borrow money, you’re taking on a real responsibility to pay the money back! You need to make monthly loan payments and usually have other costs called interest and fees.

MichaelEvery time you borrow money and keep your promise to pay it back, you’re proving to lenders that you keep your promises. By showing them you’re trustworthy, you strengthen your ability to borrow again the next time. This is called having a good credit record or a good credit rating. It’s also known as building a good credit history.

LuisBuying on credit has benefits and risks.

Review these key points about credit.

  • Credit = ability to borrow $
  • Lenders need trust in you
  • Borrowing means responsibility
  • You must repay
  • Loan payments, interest, fees
  • Goal: good credit history

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