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Credit Basics : What is credit?

The first think you need to know is... what IS credit?

Credit is money granted by a creditor or lender to a debtor or borrower, who defers payment of the debt. In exchange for the credit, the lender gets back the money, usually paid on a monthly basis, plus interest. The debtor gets the use of the money to pay for and take possession of things today and the creditor gets back more money than s/he loaned out. Modern society is dependent upon credit to generate sales; it enables people to have the things they want and need, but can't afford to pay for right away.

Interest is the compensation that is demanded by the creditor for the use of his/her money. Money has a "time value" to it; over time (due to inflation) the value of money decreases: what a dollar will buy today is much less than what a dollar could purchase 20 years ago. Since a creditor pays out money today in exchange for a repayment of it in the future, the creditor loses the time value of that money. In order that creditors make credit available, they are allowed to charge interest, often referred to as a finance charge. For example, if a lender gives you $10 worth of credit, s/he might expect to be repaid $11 within the next two months; the extra dollar is the interest charged for the loan.

Next, let's find out what a credit score is...

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