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how does credit work

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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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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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