Credit

Element III: Family and Personal Finance

Credit is defined as confidence in a persons ability and intention to fulfill financial obligations, entitling a person to be trusted when buying or borrowing something of value including money. A persons credit limit is the total dollar amount established by a creditor (one who is lending the money) to be available for use. A credit limit is established in relation to the amount of money a person earns and owes which determines how much a person can reasonably afford to pay back.

Consumer credit provides loans for the purchase of goods and services, mostly such expensive, durable goods as automobiles and major appliances. Home mortgages could be considered consumer credit, but as a form of long-term debt, they are usually excluded.

In the United States the most common type of consumer credit is INSTALLMENT PLANS, those repaid over a period of time. Installment loans are made mostly by commercial banks, finance companies, and credit unions. So-called revolving charge accounts at retail stores and bank charge cards are related forms of consumer credit. Interest-rate ceilings for consumer credit are controlled by state usury laws.

The single best use of credit is to invest the borrowed money in appreciables; items which grow in value or offer you a higher rate of return than the cost of the money you have borrowed on credit.

Financial success requires practiced discipline, and there is no better way to practice than with credit management. You do not have to cut up you credit cards or refuse to use a line of credit from your bank or department store. What you will need to do is develop the craftsman's discipline for using resources with prudence and not wasting them leaving you in a situation which controls you instead of you controlling it.

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