How credit work?

Question

I would like to know how the credit works. I don't really understand what the balance, equity and other stuff like interest rate. Can someone explain me how can I have knowledge in his kind of thing? I am 16 years old, and I am curious to know. I am afraid sometimes that I won't learn that thing because i dont understand them



How can I have a credit card without my parents help when I'm 18?

Answer 1

The only thing you really need to know right now is don't buy with credit what you can't afford to pay off in 2 monthly payments. Make sure you pay more than the minimum due on credit cards and pay it before the due date. It will help you a lot when you want to buy a car or something. I got this off a website.
Hope it helps.

What is credit?
You are granted credit when an organisation or individual makes a sum available for you to borrow.

There are two main types of credit.
Home loans, or mortgages, and personal or shop loans are linked to a specific item or items – for example, a new kitchen, or a house
Revolving credit on payment cards can give you access to a fixed amount of money that you can spend as you wish, in a wide range of retailers and other outlets



Repayment
Loans are normally repaid in regular instalments over an agreed period of time. Mortgages, or home loans, can be repaid in variable instalments but most personal loans specify fixed repayments of approximately equal amounts.

If you want to make another major purchase when you have finished paying off one loan, you need to negotiate a new loan.

Revolving credit means that you always have access to the amount of your line of credit that remains unspent. And every time you pay off some of the outstanding amount, that proportion of your credit limit becomes available for you to spend again.

So if you have a credit limit of €1,000, spend €300 and repay €100, you have €800 available to spend.

Whatever type of loan you choose, be certain to make your repayments on time, or you can face financial penalties.


Interest
In order to cover the lending risk and to make a profit on their money, lenders generally charge interest on loans and revolving credit. You must remember this when you are calculating your repayments.

For example, if you borrow $100 and interest is payable at an annual rate of ten per cent, the total cost is $110. This is known as simple interest. It is rarely charged on borrowings.

Compound interest is more common. It means that interest is charged on the interest at regular intervals.

For example – if you owe $100 and are charged ten per cent compound interest each year, at the end of year one you will owe $110. In year two, the lender will charge ten per cent of this sum and add it to the outstanding amount, so you will owe $121, and so on. Interest may be compounded after any period – a day, a week, a month and so on.

With fixed repayment loans, the amount of interest is worked out in advance and added into the repayments. There is often a penalty if you want to repay the outstanding amount earlier than agreed.

With revolving credit, you can repay as much or as little as you want, at any point. You can often avoid paying any interest at all if you repay the total amount you have borrowed on the date when the first repayment is due.

Answer 2

Credit is very complex. Most credit decisions are based on credit scores now. So many details figure in but, but here are some basics.
~The amount of credit available, and the ratio of debt to available credit: A good rule of thumb here is to try to avoid going over 50% of the available credit line, and try to have a small number of accounts. If you are maxed, this is considered a warning flag. At the same time, a large number of cards with a large amount of available credit can still be a liablity. (Since it is already available, you could use it and be unable to pay new obligations.)
~Avoid paying any bills late (now some utilities can even be reported on your credit); late payments can take quite a while to drop off of your report. To be safe, try to make sure bills are paid on time; if a bill will be late (if you don't receive you bill, or are sick, whatever reason), make sure you call the company. Keep them informed, and that can prevent any problems later on.
~Pay more than the minimum, even if it is only a small amount. That will be reported positively.

There is much more information to be had, look at the credit reporting agencies' websites. Equifax, TransUnion, & Experian are the three main reporting agencies in the current market.

When you start to establish credit, you may have to accept some help when you first start. If that is absolutely not an option, look at a secured credit card. If you start a savings account now, you can establish a relationship with a bank, however you will need to keep adding to the account and leave the money alone.
Last but not least, as odd as it sounds, know the companies that you deal with. Find out what institition is issuing the credit, and avoid Banc's vs. Bank's. Try to stay with larger, more established financial companies. They are less likely to have shadey practices, and generally reflect better on your credit.

Good luck.

Answer 3

You will probably get credit offers in the mail. Credit cards can be a wonderful thing, but you need to always remember you are spending real money. If you don't pay off your full balance each month, you will start to be charged interest on that debt. The biggest problem young people have with credit is it gives them an easy way to buy things all their fiends have, lots of shiny junk, but in the end you really probably could not have afforded it and would not have purchased it if you had to save up the money for 6 months in advance.

Use it wisely, get used to it. Having a good credit rating is one of the most important things for being a successful adult. It helps you rent apartments, buy a house, some jobs will check your credit, etc.