About Credit

Have you ever loaned someone money? Did the person pay you back in a reasonable amount of time? If not, would you be willing to loan that person money again? These are the questions creditors ask every time you apply for a loan or a credit card.

Credit is a privilege, not a right.

Credit is a privilege, not a right. It allows you to borrow tomorrow's money to pay for something you get today. When you use credit to buy something, such as a car, what you're really doing is promising to repay a debt. Another way to look at it is that you're spending your future income now.

Credit is extended several ways, including credit cards, personal loans, car loans and home mortgages. The terms of your debt repayment include interest. The interest on credit is usually expressed as an annual percentage rate (APR). The APR usually appears in the credit terms on the credit application and takes into consideration how long it will take you to pay back the loan. This rate can range from a few percentage points to well over 20%. The lower the interest rate, the less money you will spend repaying your debt.


APR and Monthly Payments

It's important to understand the difference between the APR and your monthly payment. Your monthly payment is composed of two things:

1. A portion of the original amount of the loan.
2. A portion of the APR.

In other words, your monthly payment might be reasonable, but if the APR is very high, it will cost you more and take you longer to pay off the debt. Most loans are structured so that you pay off the interest first, then you pay off the principal or original debt. So, when the APR is high, your interest rate is likely to be high and there may be extra fees, all of which means you spend more time – and more money – paying off the debt. When comparing loans, be sure to look at the APR. The lower the rate, the better.

Good credit terms and interest rates are earned. The best way to earn them is to have a stable income and show creditors that you are willing and able to repay borrowed funds as promised.

Why credit is important

 

 

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