What is credit?

Some key concepts about credit
Justin
Credit means being able to borrow money from a lender with a promise to pay them back, usually in monthly payments. Car loans, student loans, credit cards, and home mortgages are all examples of credit.
Kayla
The lender makes money by charging you an extra amount in interest and fees over and above the amount of the loan itself.
Justin
How much will borrowing money cost you? It mostly depends on three things: How much you borrow, called the principal; how long you take to pay the money back, known as the term ….
Kayla
… and the interest rate you’re being charged.
Justin
Lenders will only loan you money if they have trust and confidence that you’re able to pay them back. Earning their trust is called establishing credit.
Kayla
Every time you borrow money and keep your promise to pay it back, you strengthen your ability to borrow again the next time. That’s called building a good credit record, or a good credit history.
Justin
Using credit can help you reach your goals, but remember: credit has benefits and risks.

Key concepts:

  • Credit is the ability to borrow money
  • Establishing credit is about gaining the trust of lenders
  • Borrowing is the responsibility to repay (loan payments, interest, fees)
  • Costs depend on interest rate and how long you take to repay
  • Your goal is to achieve a good credit history

Click the Next button to discover some benefits and risks of borrowing money.