The concept of credit

When people offer you credit, they're saying, "I believe you'll repay me." In fact, "credit" comes from the Latin word "credo," which means I believe." As our society moves further away from paper money and coins, your daily finances become more dependent on the trust people have in you. The credit system is open to all. If you choose to use credit with good judgment, its power will increase with use. If you misuse it, the power will decrease. Like anything based on people's faith in each other, credit is both a fragile and a precious thing.

You’re offered it
Actually, credit is difficult to avoid. The moment you ask for electricity in your home, you'll enter the credit system. Since the utility can't know in advance how much you'll use, they let you use their product daily but pay them only once a month. (The utility may, however, ask you for a security deposit.)

Many stores and dealers of every kind will also encourage you to buy on credit even if you can afford to pay cash. It's seen as a way to establish a comfortable relationship with customers and to make it easy for you to buy more of their products.

People who own homes are familiar with credit: They've received a mortgage loan. In fact, the government entices all of us to use this form of credit by offering the single biggest tax break-tax deductions on mortgage loan interest payments.

You use it or store it
To use the credit mats offered, you simply buy now and agree to pay later: You borrow. There can be significant benefits.

• Rather than wait to save up so you can afford something, you can use it while you pay for it. And with a credit card, you can purchase goods by phone from almost anywhere in the world.
• You could also choose to save your credit for when you really need it rather than use it right away. This is called having "buying power." For example, you have instant access to cash in an emergency. It also gives you the flexibility to buy on the spur of the moment, beat a price increase, or take advantage of a sale.

You repay your debt
When you borrow money, you "go into debt," and arc required to repay what you borrow. Those payments will claim a portion of your future income but will also reduce your debt. By spreading payments over time and paying interest, you'll increase the overall cost of borrowing. But that may he offset by two advantages: avoiding a lump sum payment up front and being able to budget for the future.

Whenever you accept credit, you must sign a credit agreement. Once you signify that you've read and understood it, you'll be bound by its terms and conditions.

You build more credit
Your performance in repaying the debt, showing how you handle credit, is reported by the lender to the credit bureau. If you've repaid faithfully and handled any problems conscientiously, you'll most likely be offered more credit. Every time you borrow and repay-every time you use your credit-the cycle begins again. Each time the cycle is completed, your ability to borrow will either increase or decrease depending on your performance. It's your responsibility to ensure that your ability to repay matches your ability to borrow.

If you neglect to make timely repayments, you break your contract. If the lender seeks legal recourse, future credit will be difficult for you to obtain.