What is credit? In layman’s terms it is a form of money that is given by a lender to an individual to use for buying something. Credit can also be referred as a type of assurance, which lets one person gives money to another person or a group of individuals where the latter is expected to return or reimburse the money to the first person in a future date. As credit is one of the most popular forms of loan in the market, it is important for one to know exactly how it works.
Credit is nothing but a promise to pay back a loan or other financial obligation to the lender or the creditor. Credit can also be defined as the assurance that allows an individual or an organization to give money to another person or a group of individuals where the latter does not repay the money at a certain date or time.
Before going into the details on what is credit, it is essential to define the meaning of it. In simple terms credit is a form of loan where one is obliged to return the amount borrowed to the lender in case he or she fails to do so. In credit, there are different types of credit including credit cards, auto loans and home equity loans.
In general credit is given by people based on their financial needs and requirements. When you want to borrow money, the lender will determine whether your needs are worth of the loan or not. If the lender deems that you are a good borrower, he will give you credit and in this regard, you will be granted with the right to borrow money. However, if the lender finds that you are not a good borrower, then he might not give you credit and will not charge you any interest fee. The reason behind this is that if you do not pay the loan back, you will not get credit or will not receive anything from the bank or lender.
The most commonly used form of credit is a credit card, which helps an individual to pay back the borrowed amount to the lender in a fixed time period. It is important to have a credit card to avoid getting into debts; thus, a credit card can be termed as the most basic form of credit.
There are also some cards that are issued to people who do not have credit. Such cards are known as debit cards. These debit cards are issued for a certain purpose and they cannot be used for making purchases. The reason for this is that when you are not able to pay the debt back in a fixed time period, the card company deducts the amount that you owe them and you are given the card with the option to make the payment once the balance is cleared.
However, it should be noted that such cards are not for everyone since they are only issued for people with poor credit histories and no credit history, so if you do not qualify for these cards you should not consider them. Also, people with bad credit history should be careful while using such cards since they can attract a lot of risks and will definitely attract a lot of losses.
One of the more common types of cards available in the market is secured credit cards, which are issued for individuals who are unable to obtain a credit card. A person with bad credit history can avail a secured card where his or her name and his or her account number will be placed with a particular card holder so that the card holder will be asked to deposit the cardholder’s credit card information with the issuer. This will make the cardholder eligible for the credit.