Credit is "extended" to you when someone lends you money or assets, and trusts you to pay it back. It gives you the ability to buy today and pay tomorrow.
There are two types of credit:
- Unsecured: There is no asset or collateral being used to secure the debt. An example of unsecured credit is a credit card.
- Secured: Some type of collateral is used to secure the debt. This can be a house, car or boat that the lender can take back if the loan isn't paid.
Benefits of Credit
- Easier to buy a house
- Easier to finance a car
- In some cases, necessary to get car insurance
- Safer than carrying cash
- Easier to rent an apartment
- Ability to rent a car
- Allows you to make purchases over the internet
- Some jobs may have a credit check requirement
- Can use it to pay college expenses
- Necessary to build a credit history
Risks of Credit
- Easier to make impulse purchases
- Can accumulate more debt than you can afford
- Misunderstanding of complicated terms and conditions