There is nothing new about credit as it has been used for centuries, but in today’s society it is far more widely used than ever before. Credit simply involves paying for something later and in England it used to be referred to as having something on ‘tick’ or ‘on the never never’. Pawn brokers were one of the first avenues used as credit sources, involving pawning an item for cash and then buying it back for a higher price than the cash you received. Implicit in the transaction was trust and interest. The modern form of credit replaces trust with a Fico score and interest remains the common gain of the lender.
Credit cards are the most widely used form of revolving credit, where that little piece of plastic allows you to spend money you may not have at the moment. However if credit cards are used wisely they cost you absolutely nothing to use if you have one free of fees, as the smart user never pays interest or late payment charges. They can also provide free additional insurance cover and extended warranties.
Not all credit cards are created equal though and some are expensive to hold. Secured credit cards are issued to those who don’t have the best of credit scores and are deemed high risk for lenders. These cards involve a deposit being placed with the card issuer to match the amount of credit available on the card, and carry a fee as well. They are primarily used by those needing to establish a credit score or rebuild one.
The concept of prepaid credit cards is rather misleading as they don’t actually involve credit at all but assume the word credit in their advertising. As they only involve spending money which you have already loaded onto your card they really ought to bear a more original name as they have no relation to actual credit.
Loans also count as credit but involve instalment credit rather than revolving credit. It is possible to manage a credit card so badly that the outstanding balance never goes down, whilst loans do reduce as you make the monthly payments and there is a clear end in sight. Loans can be secured or unsecured; the secured kind are akin to leaving Granny’s jewelry with the pawn broker as if you fail to repay the debt then whatever form of security you have put up against the loan, usually a property, is at risk. Unsecured loans on the other hand keep your prime assets safe but cost you more to service in interest fees as they are higher risk.
Payday loans are another kind of loan but these require no credit check as well as no security. They were designed in the fashion of pawn broking, meant for short term lending until the next pay packet came in. They are as much open to abuse by consumers as credit cards and either method of borrowing can lead to greater debt if not used wisely.
If you do get wise to the credit deals on offer you can use credit to your advantage, by earning cash backs and reward points by using it, whilst never paying a cent in interest. The absolutely best time to use credit is when you really have no need for it, and it becomes a profitable friend to have.