What is credit?

Your guides introduce the idea of credit.

CarlosCredit means being able to borrow money from a lender with a promise to pay them back, usually in monthly payments. Car loans, student loans, credit cards, and home mortgages are all examples of credit.

OliviaThe lender makes money by charging you an extra amount in interest and fees over and above the amount of the loan itself.

CarlosHow much will borrowing money cost you? It mostly depends on three things: How much you borrow, called the principal; how long you take to pay the money back, known as the term ….

Olivia… and the interest rate you’re being charged.

 

CarlosRight! And lenders will only loan you money if they have trust and confidence that you’re able to pay them back. Earning their trust is called establishing credit.

OliviaEvery time you borrow money and keep your promise to pay it back, you strengthen your ability to borrow again the next time. That’s called building a good credit record, or a good credit history.

CarlosUsing credit can help you reach your goals, but remember: credit has benefits and risks.

Key concepts:

  • Credit is the ability to borrow money
  • Establishing credit is about gaining the trust of lenders
  • Borrowing is the responsibility to repay (loan payments, interest, fees)
  • Costs depend on interest rate & how long you take to repay
  • Your goal is to achieve a good credit history

 
Click the Next button to discover some benefits and risks of borrowing money.