Loans, Credit and Credit Records
Some people buy things on credit.
Two common types of credit are loans
and credit cards.
With a loan, a person or institution will let you borrow money
in exchange for your promise to pay it back over a certain amount
of time and with interest.
You usually will have to back up your promise by proving to the
lender that you will pay the money back. One way to prove that you
will pay back the money is through the use of collateral.
Collateral is property that you pledge in order to guarantee somebody
you'll pay back money that you borrow. If you don't pay back the
money, the lender can take your collateral property to reimburse
them for your debt.
Credit cards are another way to buy things on credit. A credit
card is a piece of plastic that a financial institution issues to
you. When you buy something with a credit card, the seller charges
the price of the item to an account associated with your card. At
the end of the month, the company that issued the credit card sends
you a bill to pay. The bill may include other fees like interest
charges, or if you are late in paying what you owe, a late-payment
charge.
If you are financially responsible, credit cards can be a good
thing. They are convenient ways to make large purchases or to avoid
carrying cash. But credit cards can also get you into trouble if
you don't handle them responsibly. If you don't pay them on time,
not only will you be hit with big interest charges, but you can
also hurt your future by establishing a poor credit record.
Banks, credit-card companies and other lenders may report how you
handle credit to agencies that keep track of how well people pay
their bills. The record of how well you pay your bills is called
your credit report.
Any time you try to borrow money or to get a credit card, the lenders
check your credit record. If it is bad, you may not be able to get
the loan or credit.
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