Unleash your superpower! Credit is the way to go

Finally! The start of one of my favorite topics in personal finance. This is one of those tools that justify the name of this series “Unleash your Superpower”. Let’s begin!

In its most basic form Credit is when someone gives you money and you can pay it back later but?with some strings attached.

Let me explain, suppose you want to buy something like a house or start a business and you don’t have the whole amount as of now but you have a stable source of income and you know you can pay for the purchase as you go, that’s where credit comes in.

Credit is often extended by lenders, such as banks, credit unions, and credit card companies. To obtain credit, you need to demonstrate your ability to repay the borrowed funds, which can include factors such as

• your credit history
• income
• debt-to-income ratio .

Types of Credit Instruments

Credit comes in many forms, and it’s essential to understand the different types to make informed financial decisions. Here are some known credit instruments that you should be aware of:

• Personal Loans:?These are unsecured loans meaning you can get them without?collateral ?and they can be used for any purpose such as debt consolidation or any personal expenses.
• Lines of Credit:?A line of credit is a revolving loan that allows you to borrow money up to a certain limit which keeps getting replenished. Credit cards are one of the most common examples, and can be used for a variety of purposes. There is a lot more to credit cards than meets the eye, and we will explore this in detail in future articles.
• Credit Builders:?If you’re someone who doesn’t have a credit history and looking to build one, this is the best way to go. These loans are specifically designed to help you build credit and are often secured with a savings account. Your payments are reported to credit bureaus to establish a credit history.
• BNPL:?Buy Now Pay Later is a relatively new concept, it allows consumers to purchase products upfront and pay for them later. It’s similar to a short-term loan but with specific terms and conditions. The interesting thing is, that BNPL often doesn’t charge interest?since, for companies,?you buying their product is far more important than the interest income they would’ve generated.?Although, You should be careful while using BNPL since there might be certain associated fees and penalties for missed payments.

Understanding the Cycle of Credit

Have you ever wondered why banks and lenders give you credit? Is it out of the goodness of their hearts? Of course not! They do it because they want to make money, and credit is a great way to do that. But don’t you worry, credit can also make you happy, as long as you pay your dues on time, that is.

• From the lender’s perspective, offering credit allows them to earn interest and fees on the money they lend, which is a major source of revenue. It helps them to expand their customer base and build long-term relationships with borrowers.
• From the borrower’s perspective, credit can help them to achieve their goals, whether it’s buying a home or starting a business and such big-ticket purchases would be out of the equation otherwise.

Credit and Responsible Use

We’ve seen the good side of credit, but it’s equally important to use it cautiously. This means:

• Only borrow what you can afford to repay.
• Make payments on time and in full.
• Avoid taking on more credit than you need and not using credit to fund a lifestyle that you can’t afford.

If you’re not careful, you might end up in a never-ending cycle of debt where you’ll keep piling on interest on your missed payments and all of those benefits will go up in smoke.

Conclusion

Chains of habit are too light to be felt until they are too heavy to be broken.— Warren Buffett

In Simple terms, it means our bad habits often don’t seem that bad until they get to the point where we can no longer easily break them. Thus, building good credit habits now can help you achieve financial freedom in the future and the opposite holds true as well since it can also be a double-edged sword if not used responsibly.

Credit is an extremely powerful tool that can be used to achieve your financial goals, or completely destroy them. It all depends on how you use it! We’ll explore multiple credit instruments in upcoming articles so stay tuned to unleash your superpower!