On radio and television a person can see and hear many advertisements for credit. The forms of credit on offer include credit cards, home mortgages, car loans, easy-payment plans for furniture and household appliances, among others. Handling credit is one of the more important financial decisions a consumer faces. In order to make good decisions about credit, you need to know what credit is and how it can help you.
In this lesson, you learn why it is important to have a good credit rating; you also will learn to define and use some basic terms associated with credit.
Credit is an arrangement allowing consumers to buy goods and services now and pay for them later. Credit arrangements depend upon a suppliers' confidence in a buyer's ability and intention to pay what he or she owes at some future time. People who buy on credit and pay off their debts promptly develop what is called a good credit rating. Having a good credit rating or good credit, as it is often called is important because it can help people get loans for cars, homes, furniture and other goods and services. Banks and lending institutions don't want to lend money to poor credit risks that is, to people who might not repay their loans. They want to be sure they are going to get their money back. To determine how risky a given loan might be, lending institutions rely on credit bureaus. Visit this web site to learn about credit bureaus .
The site explains the debt-to-income ratio . This ratio compares a person's income to his or her debts, yielding a percentage figure to show how much of a person's income will go toward paying debts. When you view the site, you should answer the following questions on worksheet one. Print out the worksheet so that you can use it as you visit the web site.
It is also important that you understand the importance of good credit. When payments are 30 days late, the lateness will affect the debtor's beacon score. This is the score that tells what kind of loan-risk a person is. The lower the beacon score, the less likely it is that a person will get approved for a loan.
Many students do not have a beacon score because they have no credit. Probably the easiest way to establish credit would be by obtaining a credit card. Visit the glossary of credit card terms , it introduces several terms associated with obtaining and using a credit card.
When you have finished reading the information on this site, you should be able to explain the following terms: APR, annual fee, finance charge, minimum payment, balance transfer, billing cycle, cash advance, grace period, late-payment fee, classic card, gold card, platinum card, rebate card, secured card and unsecured card. Define these terms on worksheet one.
After discussing the debt-to-income ratio and the terms associated with credit cards, you should be able to see that a good credit rating will help you to qualify for loans and other forms of credit. Good credit equals acceptability among lenders, and that in turn depends on the borrower's debt-to-income ratio.