How credit works
Chances are you're familiar with credit. It's a convenient way to make purchases — from small, regular ones like groceries to large, unique ones like homes or cars. But you may not be sure what happens when you use a credit card or take a loan, the two most common examples of using credit. Learning more can help you cut costs and avoid using more credit than you can afford.
The cost of using credit
When you use credit, you're borrowing someone else's money. You agree to pay it back at a certain time, or on a certain schedule. And for the convenience of having someone else's money available when you need it, you pay a fee. That fee is known as interest and is usually charged as a percentage of what you borrowed.
That means the more you borrow, the more you'll have to pay in interest. What borrowing will cost you is also affected by how long you take to pay the money back.
Paying on time
With most types of credit, you agree to make payments on a certain schedule, and if you're late or don't pay what's due, you'll have to pay a penalty or late fee. That makes borrowing more expensive. If you have trouble repaying, it's possible that you've borrowed more than you can afford, or perhaps your circumstances have changed. And if you ignore the problem, it will only get worse, as penalties and interest build due to late or missed payments.
