Imagine that you are out shopping with your friends. One of them finds a dress that she really likes and heads toward the checkout counter to pay for it. Since you have already looked around the store that you are currently in and found nothing that interests you, you decide to accompany your friend to the checkout. The cashier rings up her dress, and your friend swipes her credit card on the payment terminal. After you have left the store, you are curious about how her credit card works. Although your friend has recently started working and earned around $100 so far, she has used the same credit card for purchases throughout the day that have far exceeded that amount. How is this possible?
Well, credit cards are actually access points to a bank’s supply of money that must be paid back within a certain period of time - typically between 20-25 days. Users of credit cards accumulate periodic debt until the end of their billing cycle, when they are expected to repay their credit after having time to earn enough money. In fact, credit is defined as an agreement that borrowed money will be repaid to the lender according to their conditions. Good credit is built up by using your credit card responsibly, meaning you pay bills on time and avoid withdrawing more money than your limit. If you complete your payments by the deadline, you will usually only have to pay the extracted amount. However, if you fail to pay a bill on time or only pay it partially, credit card companies can charge you interest on the remaining amount. It is in your best interest to resolve outstanding balances as soon as possible to avoid losing more money. All of your past financial actions can also impact your future accountability because they are summed up in an important number called your credit score.
Credit scores are determined by a credit reporting agency called FICO. Everyone starts with different credit scores, usually ranging between 500 to 700 points depending on the timeliness of your initial payments. However, FICO can lower this number if you are late to pay your bills or open up many lines of credit. These are considered risky actions because they lower your capability and trustworthiness to pay back the credit card companies on time. It is important to maintain as high of a credit score as possible because lenders look at your credit score before offering you a loan or mortgage, which many people take in order to buy expensive assets such as a house or car. If you have a low credit score, it will be difficult to find a lender that is willing to trust you with a large amount of money. On the other hand, high credit scores will allow you to borrow more money and buy your desired product faster. It is not easy to manage credit payments, but there are also vast opportunities that can come with maintaining a good credit score and taking control of your financial responsibilities.
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