Credit. The indistinct little word that all financial institutions use. Credit. But what is credit? What does it mean if “your credit score is too low” or “I need to increase my credit score”?
Read more to master your understanding of the term credit and become financially healthy.
What Is Credit?
The term credit can be used in many different ways, such as to describe an income entry into your company’s accounting system, money you have available to spend, a credit refund etc. But what we are focusing on, is borrowed credit.
In a nutshell, the term credit refers to when you buy something now and only pay for it later. It is usually a contractual agreement between yourself and the financial institution where you lawfully agree to pay the institution back.
Credit can also refer to the creditworthiness or credit history of an individual or company. In this instance, credit is an entry that depicts an increase in liability. If you are granted a loan from a financial institution, your liability increases as you now owe money.
But depending on your individual or company’s credit score, you may be granted a loan with a higher or lower interest rate, or be denied entirely.
Types of Credit
- Revolving Loan: This means that the financial institution has granted you a certain amount of money you may spend at your convenience and you need to pay it back later, usually in a lump sum or as monthly repayments. The most common form of buying on credit is via the use of credit cards. Your payments will fluctuate each month depending on how much of the credit you have spent.
- Installment Credit/loans: This is when you borrow a set amount of money from the financial institution for a specific purpose, such as for the purchase of a car, stock for your company or to finance renovations. When you use installment credit, you will make equal monthly repayments to the financial institution over a period of time and these types of loans usually include interest.
As mentioned above, your credit history will determine how much credit you can receive from the financial institution, at what interest rate you would be paying back and over what period.
A credit history simply reflects how you’ve spent your money over a period of time. This includes a summary of your credit cards, loans, and if you have paid your bills or debit orders on time.
If you have paid all your bills with mostly cash and have never borrowed any money, you won’t have much of a credit history, so the chances of receiving a large credit amount and good interest rate will be lower. However, if you have borrowed money before from a financial institution and have paid it back as agreed, your credit history will be stronger.
Your credit score is based on your credit history. Your credit score is a 3 digit figure that indicates how likely you are to repay your debts. So ultimately, the better your credit history, the better your overall credit score will be.
And that is what you need to understand about credit to make financially healthy decisions and choices. Always remember, build a legacy and don’t leave crippling debt behind.
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