The right granted by a creditor to pay in the future in order to buy or borrow in the present; also, a sum of money owed to a person or business.
Credit is almost a daily part of our lives. Anytime you borrow money, that is a form a credit, whether it is with a credit card, mortgage, or asking a friend for a few bucks. Credit involves two parties: the borrower, who is actually borrowing the money, and the lender, who is willing to loan the borrower the money with the expectation that the sum will be repaid.
Although credit is a pervasive part of our lives, it is used in two ways. First, it is used to help manage immediate cash-flow. For example, hotel rooms and airline tickets usually require a credit card for purchase. The room or ticket is purchased with credit, but paid off with the monthly payment. A second use for credit is to help reach long term goals. Attending college, buying a car, or owning a home, are all long term goals that are usually reached through the use of credit.
Even though using credit can help you to reach your goals, it can also be detrimental to you. In your regular use of credit if you borrow too much so that you are late in repaying the debt, it can hurt your credit history. Your credit history is a financial snapshot of the borrowing aspect of your life. Potential employers, landlords, retailers, and lenders all can have access to this information, so being irresponsible with credit can hurt you in many ways. Also, burdening yourself by getting too much debt by using credit too frequently puts incredible stress on your life.
It is important to be smart when using credit. Look at the consequences. Is it better to wait for that purchase until you can save enough to pay cash, or would it be better to buy it now with credit even though you will have to pay interest? Also, don't just look at the cost of the monthly payment when using credit. Because of interest, using credit can greatly increase the cost of whatever you are purchasing through using the credit. For example, a $200,000 house with a 30 year fixed rate mortgage with a 7 percent interest rate and 20 percent down payment will cost $223,217.48 just in interest payments alone by the time it is paid off. The interest adds up to more than the original cost of the house! Having to pay interest for a home is at least tax deductible, but if you have to pay interest for credit card purchases, you are really throwing away money.
Credit can be a valuable tool. By being disciplined and smart in your use of credit, you can have it work for you and not against you.