How Credit Works

Credit is a convenient way to make purchases. You can purchase everything from small incidental purchases to everyday purchases like groceries, gas, clothing, etc. Credit can also be used to make large purchases like homes or automobiles. Some consumers are not aware how credit works and what happens when you use a credit card or get a loan. One of the most important things to know about credit is to realize that these are borrowed funds and have to be repaid.

The cost of credit

Remember when you use credit you are really borrowing money You sign an agreement that you will pay back the amount borrowed within a certain time. Along with this you will have to pay any interest or fees you agreed to for the convenience of using someone else's money. This means the more you borrow the more you will have to pay back. All this needs to be taken into account when borrowing money.

Making payments when due

Whenever you obtain credit, it is important that you make your payments as agreed. If you pay after the payment is due, you will have to pay a late payment fee. If you make your payment more than 30 days late, the late payment will be recorded on your credit report and will affect your credit rating. Being late on payments can also trigger higher interest rates and additional fees driving up your monthly payments.

If you are having trouble making your payments or can’t make your payments when they are due it may indicate additional problems. It's possible you borrowed more than you can afford. If this is the case, it's in your best interest that you communicate with your creditor. If you communicate with the creditor they will probably work with you. If you ignore them it will only get worse and your credit will be seriously affected. They will not go away but will add more penalties and interest will continue to accumulate.

So use your credit wisely! It's a valuable privilege that should be used and not abused.