What Is Credit?
May 15, 2020
What is the definition of credit? Credit is the ability of a customer to obtain goods or services before payment, based on the trust that the customer has the ability to make payments on a future date.
Also, part of this agreement between the lender and the borrower, is the amount of money available for lending at any time, as well as the interest rate during the period of time the money is borrowed.
A Brief History About Credit and Credit Cards
In 1946, John Biggins would start the first bank issued charge card in Brooklyn, New York. The purchases would be sent to Biggins Bank and he would play the middle man between customer and business owner. The purchases that were made were by local bank customers with the card, and the system was called the "closed-loop system".
The first universal credit card was issued by Diner's Card,Inc. in 1950 to be used for restaurant bills only. It was the start of a new way of paying for goods and services and there was hope for it to be expanded in the future. Then, in 1958 the American Express company started a credit card for travel and entertainment purchases. American express would be the first credit card company in 1959 to introduce the plastic credit card that we have come to use to present date.
It wouldn't be until 1960, when IBM introduced magnetic stripe or magstripe to credit cards. The magnetic stripe on the credit card is read by swiping past a magnetic reading head. Magnetic stripe cards became commonly used in credit cards, identity cards, and transportation tickets everywhere.
Different Types of Credit
The following are 5 different forms of credit used widely by consumers today. The payment terms and interest rate range may vary considerably.
1. Charge Cards: They are very similar to your average credit card, except you are expected to pay your bill in full each month. Charge cards have a set credit limit for purchases and they allow you to pay your creditor or lender on a later date. A good example of a charge card would be the American Express "Green Card", which must be paid in full each month to keep in good standing.
2. Service Credit: Utility bills or even a cell phone bill would fall into this category. Service credit allows members to pay at a later date (usually the month following the service charge currently billed). Unpaid balances left can incur fees, or in some cases, shut off of service until the debt is paid.
3. Installment Credit: The borrower takes out a loan for a specific amount and has a specific time frame set to repay the loan. The interest charges and fees are pre-determined and calculated into the monthly payment for an agreed upon period. Installment credit is typically any type of personal loan, home mortgages, loans for cars and other goods such as furniture or appliances on occasion as well.
4. Revolving Credit: A lending institution will set a money limit and allow you to borrow money at any time. This is the most commonly type of credit used today. The lender determines your interest rate and credit limit based on your credit score. Your balance is rolled over from month to month until you finish paying your debt in full. If you pay immediately, then no interest fees are charged. Your average credit card or store credit card are referred to as revolving credit.
5. Lines of Credit: Most banks and credit unions offer unsecured business and personal lines of credit. Depending on your credit score, financial picture, and relationship with the bank, you may need to secure the line of credit with an asset. The line of credit gives you the flexibility to borrow cash at any time and up to any amount within your set limit. You can borrow and pay back as much as you want, as long as your line remains open. This is different then most loans that have fixed installments. Lines of credit also tend to have lower interest rates than average credit cards.
Our experts can help you obtain and build positive credit the right way. Call today for a Free Credit Report Analysis. Our experts will help you check for any errors on your credit report.
Call 1 - 855 - 495 - 9212
Secured and Unsecured Credit
Secured Credit loans are always combined with an asset as collateral like a home, car, or vessel. Local banks and mortgage providers are perfect examples of secured debt lenders. Unsecured credit loans don't require collateral to be attached. The loans are usually for smaller amounts compared to secured loans. Creditors use assets to manage credit risk for very large purchases .
Why Credit is Important
The importance of credit is derived from our desire to make large purchases when cash is not available for things such as homes and vehicles. We apply for credit with lenders who offer terms that include time frame, interest rate, and other conditions . Once the agreement is signed, you are expected to make your payments on time abiding by the loan terms and conditions. Not doing so could significantly hurt your credit scores.
The importance of checking your credit is very critical when looking for an apartment or opening a service credit account like a utility bill where the amount of the deposit necessary may be large or small. Even your car insurance rate can be affected by your credit report.
How To Check Your Credit
If you are looking to purchase a home or car, the one question you should expect to hear at the dealership is, "How's your credit score?". You don't have to guess what your credit score is when making a large purchase. In fact, it is better to be prepared with your credit report and score in hand so you can make a better decision if your credit score is in line with the price, interest rate, and terms of the loan you may be looking for. This is a big problem for many potential buyers who run their credit and risk a drop in their credit score from the inquiries. The three major credit reporting agencies allow for one free credit report per year at annualcreditreport.com. This allows you to look at your credit report and inspect for any discrepancies that may cause a lower credit score and see if you have enough positive credit as well.
The Credit Score Range
The credit score range is from 300 to 850. It is based on credit history from lenders that show your ability to manage different types of credit responsibly. The benefits of having a higher score are lower interest rates and better loan terms with benefits. Learning about the credit score range can help you secure low interest rate loans to purchase homes and cars in the future.