Introduction to Credit

Depending on how you manage it, credit is a consumer's best friend or worst enemy. When you need to buy something, credit is there, providing support and encouragement. But rely on her too much and she'll turn on you, taking away the very promise of financial freedom that made her so alluring in the first place.

Credit defined

Credit is an agreement between a borrower and a lender, in which the borrower accepts money and agrees to pay it back later. The lender, in turn, charges a fee for providing this service.

If you're like most people, you generally receive offers through a direct mail letter offering a credit card with a high limit, no annual fees, or a low introductory rate. Since it sounds good, you accept. Or you might open a store account to get a discount on a large purchase. Once the account is opened, you might use the card whenever it's convenient.

Credit allows you to make large purchases and pay for them in small amounts over time. If it didn't exist, American households would have trouble owning property and buying cars. Credit used wisely is a great perk that can help you manage your finances.

Dangers of credit

Unfortunately, credit can be easily abused. While it should only be used for necessities, it's often difficult to draw the line. If your TV breaks down, for example, is it really necessary to replace it with a 42-inch, hi-definition LCD? Low monthly payments can mask a growing debt balance that may eventually become problematic.

Credit has two sides: one good, one bad. Your job is to understand how to maximize the positive and minimize the negative.