About Credit

Many times either on television or on the radio you will hear advertising about getting credit, using credit or applying for credit. If you are not familiar with credit and what you can do with it here is a summary of credit that should help you appreciate what credit actually is.

What Credit Is

Credit is actually a loan from a creditor or lending institution for the purpose of being able to purchase something that you either don't have enough money saved for or something that you prefer not to pay cash for. The person or organisation that extends you credit (called a creditor) then charges you interest on top of the credit (loan) amount and/or other fees.

There are two types of credit available, secured credit and unsecured credit.

In a secured credit arrangement, a creditor lends you money but that money is secured against an item that is used as collateral. The best example of a secured loan scenario is the purchase a property. The majority of people do not have enough money saved to purchase a home for cash so they apply for credit with a lending institution. When people are given credit for a property purchase, a lien is attached onto the property, which means two things. Firstly, you are not permitted to sell the house unless you repay what remains of the amount loaned, and secondly if you default on your repayments the lender can repossess your house and sell it in order to reclaim what is owed to them.

Conversely, unsecured credit is typically a loan or line of credit that you have when you posess a credit card. The lending institution that issues a credit card runs a credit history on you. They then determine how you pay your outstanding bills and how much total credit you have available to you to decide how much credit to extend to you. As unsecured credit offers no security to the creditor it is often harder to acquire and generally more expensive that secured credit.

As soon as you acquire credit you start to acquire a history of credit that can be used to asses your credit worthiness. If you pay your bills on time, all the time and you don't use more than half of your credit limit on your credit you will get a great credit rating. When you establish a great credit rating this will help you in many areas that you never thought would be affected by credit. For example, many employess are now credit checked by employers as a part of the recruiting process; employers may equate good personal financial managament skills to the idea that an employee is not a "risk". Good credit will also give you access to the best interest rates when you apply for additional credit.

One thing that you should know is once you establish credit you need to maintain it.

Your credit status can be damaged very easily. Make a few late payments, especially over 30 days late and see how your credit rating plummets. Once you ruin your credit it takes years to repair it and will have unforeseen consequences. An example of such an affect can be a car insurance company running a credit check against you when your insurance requires renewing. If the insurer sees that you are beginning to pay bills later than required they may increase your insurance rate and request a large up-front payment from you.

For many people, having access to credit nowadays is almost as vital as the air they breathe. Therefore, it is also vital to have a good understanding of credit and how to keep your credit rating "good" so that you can reap the benefits.

Article Source: http://www.articlemonk.com

Javier Melendez is a writer for several financial websites such as the No-CreditCheck-Loan.co.uk site. His recent work concerns credit card debt consolidation research.

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