When you borrow money from a bank, you could say that the bank is giving you credit. One type of credit is a loan — like a loan for a car. Another type of credit is in the form of credit cards.
Bet you’ve heard of them! Lots of adults have credit cards!
First, let’s look at credit cards. But don’t be fooled — credit cards are serious stuff! When you have a card, it means the bank is lending you money.
And the bank or credit card company puts a limit on how much you can spend, or charge, on your card. It’s called a credit limit.
So when you use a credit card — say, for a computer — you’re taking responsibility to pay the money back. You can pay it all at once or pay a smaller amount every month. But there’s a catch — if you pay monthly, then you may have to pay interest.
So, if I buy a scooter with a credit card, and don’t pay it back all at once, I’m paying more for it!
That’s right! Unlike savings accounts, where you can earn interest, with credit you may have to pay interest. And with credit cards, the interest rate can be very high.
Credit cards are good when you’re buying something you know you can pay back quickly, or for emergencies. The goal is to pay the money back very quickly — or you’ll have to pay interest. And the longer you wait, the more you’ll pay!
Now let’s look at loans. With loans, you borrow all the money you need — all at once — and you pay it back monthly. With loans, you also have to pay interest — but it’s usually less interest than you’d pay with a credit card. Plus, with a loan, you pay it off and you’re done! No more loan!
What things do Earthlings buy that they need a loan for?
Loans are great if you’re buying really expensive things like cars, homes, or a college education. If you’ve been responsible with your money and bank accounts, banks will be more likely to give you a loan. They’ll see that you’ve been responsible with money.
Don’t forget these key points:
Click the Next button to learn about minimum payments and the cost of credit.