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how does credit work

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John’s Answer

Aaron credit cards have become an essential life tool. They are very convenient to use. The majority of businesses accept credit cards, which means you don’t have to stop by the ATM to pull out cash before going out. BUT, with all the benefits that come along with using them, there are some drawbacks to using credit cards that may dissuade you from using them. Credit cards extend your purchasing power by giving you a credit limit. This limit gives you the illusion that you have more money than you really do, because you can spend money you do not yet have, and may not get. This illusion is what gets many people into unmanageable credit card debt.

For instance if your monthly income is $4,000, and your monthly expenditures are $3,000 you have $1,000 of income to set aside. A card limit of $6,000 gives you the ability to use $6,000 you would otherwise not save up for at least six months. The dangers here are the interest and the inability to make payments that will reduce the balance. Your income in the future is reduced each time you use a credit card, or any other form of debt, because you’re borrowing money that you don't have. A portion of your future income has to go toward repaying your credit card balance, the more debt you are in the harder it becomes to pay off, or even pay down. Continuously using your card while making minimum payments increases your debt and decreases your future income.

Credit card debt is a vicious cycle to get into and tough to get out of Aaron. It can all be avoided by not charging more than you can afford to pay off, and by make payments on time. If used correctly (making your payments on time and keeping your balance low) credit cards help you build a good credit score that you can use to qualify for loans that you might need in the future. When you have good credit, the benefits can include better interest rates on mortgages, auto loans and credit cards, among other things. If you're new to credit cards, it's best to open one at a time and show that you can handle the responsibility each month. Depending on your credit card rate and how you use it, credit cards can cost you hundreds of dollars over the course of a year.

Like most things in life Aaron, there are pros and cons to using credit cards. If you’re smart about how and when you use your plastic, a credit card can prove to be an essential and useful financial tool. If you allow your spending to get ahead of you and you’re not organized when managing payments and accounts, credit cards may do more harm than good. If and when you decide to apply for a credit card, make sure you pick the one that’s best for you.

Hope this us helpful Aaron
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John’s Answer

Credit is an agreement between a borrower (someone who wants the money) and a lender ( someone/business who is willing to lend the money). This agreement is made up of an $ amount ( called principal), a period of time to repay ( typically in months), and a cost to use the money call interest. The borrower agrees to these terms and typically has to prove to the lender that they can make the payments. The lender provides the money and the borrower makes the number of payments in the agreement to satisfy replaying the lender the principal (amount loaned) and interest.
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Yumi’s Answer

Here is something from a different angle - In obtaining credit, your credit score plays a huge role. It helps your potential lenders in evaluating whether you're a good risk. Your score can be a significant deciding factor for approval or denial of your loan application. It's also factored into how much of interest you're going to need to pay. Higher the credit score, the lower the interest rate. Lower the credit score, the higher the interest rate making the loan more expensive for you.

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Kim’s Answer

Adding to John's answer. . .

There are various credit options available. One is a loan. You go to a financial institution, borrow money, and repay it, with interest, as agreed to.
Another is credit cards. Cards like Mastercard allow you to buy things pretty much anywhere, and agree to pay for them later. Store cards can only be used at certain stores. It's a dangerous thing to do when you don't have much money. Credit cards should be reserved for emergency purchases ( car repairs, etc - things you NEED, not things you WANT).

It's easy to get stuck with a lot of credit payments real easy. You talk yourself into buying a "want" on credit, because it's got a good sale price, for example. Another option is furniture. "No interest if paid in full within 60 months." So you can buy a whole roomful of furniture, and not have to pay anything at all to borrow the money. BUT, if you don't pay it off on schedule, the interest rate is outrageously high, and you end up paying a whole lot for that furniture.

There are of course student loans, and mortgages (home loans). And car loans. It's important as you start navigating the financial world that you find people you trust to ask for advice. Also, please make it a point to distinguish between wants and needs. "reliable transportation" is a need. A 2022 sports car is a want.

Also, you will learn about a "Credit rating." It's like a GPA! It grades you on how well you manage credit. It's pretty weird at times, as it gives you a higher rating if you handle credit responsibly, than if you have no credit at all! With a good credit rating, you can get loans with a lower interest rate. So, you want to manage your credit rating by always paying your bills on time!

hope some of this helps!
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dave’s Answer

basically the credit card company is lending you money and you have to pay back with INTEREST

at the end of the day I have personally found that if I cannot afford to pay for something I dont buy it!

Credit cards can be a n easy way to get into debt if you are not careful!
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