A Description Of Credit

By Author: Javier Melendez
Total Articles: 17
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Nowadays we regularly hear the word credit as it is frequently used in tv and radio advertising to promote loans or credit cards. If you are not familiar with credit and what you can do with it here is a summary of credit that should help you understand what credit actually is.

What is Credit?

Credit is actually a loan from a creditor or lending institution for the purpose of being able to purchase something that you either don't have enough money saved for or something that you prefer not to pay cash for. The creditor in return for extending you credit earns money by charging you interest, application fees or a whole assortment of other fees.

There are two types of credit available, secured credit and unsecured credit.

In a secured credit arrangement, a creditor lends you money but that money is secured against an item that is used as collateral. The best example of a secured loan scenario is the purchase a property. Most people do not posess the amount of savings required to purchase a property outright and so they have to apply for credit. When people are given credit for a property purchase, a ...
... lien is attached onto the property, which means two things. Firstly, you are not permitted to sell the house unless you repay what remains of the amount loaned, and secondly if you default on your repayments the lender can repossess your house and sell it in order to reclaim what is owed to them.

Conversely, unsecured credit is typically a loan or line of credit that you have when you posess a credit card. The creditor issuing your credit card in this instance will run a credit check against you. They then determine how you pay your outstanding bills and how much total credit you have available to you to decide how much credit to extend to you. As unsecured credit offers no security to the creditor it is often harder to acquire and generally more expensive that secured credit.

As soon as you acquire credit you start to acquire a history of credit that can be used to asses your credit worthiness. If you pay your bills on time, all the time and you don't use more than half of your credit limit on your credit you will get a great credit rating. As soon as you acquire a good credit rating you will see potential improvements in many other areas in your life. For example many employers now want to run a credit report on you before you are hired; they feel if you do not handle your credit properly then you may be an employment risk. People with a good credit history are also more likely to receive better rates of interest and better conditions when applying for further credit or loans.

One thing that you should know is once you establish credit you need to maintain it.

Your credit status can be damaged very easily. Make a few late payments, especially over 30 days late and see how your credit rating plummets. Once you ruin your credit it takes years to repair it and will have unforeseen consequences. An example of such an affect can be a car insurance company running a credit check against you when your insurance requires renewing. If the insurer sees that you are beginning to pay bills later than required they may increase your insurance rate and request a large up-front payment from you.

For many people, having access to credit nowadays is almost as vital as the air they breathe. Therefore, it is also vital to have a good understanding of credit and how to keep your credit rating "good" so that you can reap the benefits.