Understanding Credit

Credit is the ability to borrow money from a lender, such as a bank, a credit union, a loan company, or, in the case of a student loan, from the federal government. A lender may also be known as a creditor.

When you borrow, you promise to repay the full amount the lender provides. In most cases, you also pay interest for the opportunity to use the money. The interest rate, which the lender sets and may be either fixed or variable, is multiplied times what you've borrowed to find the amount of interest you owe.

The rate is quoted as an annual percentage rate (APR), which lets you calculate the cost of borrowing for one year.

You can borrow money in two main ways:

  • You can take a loan to pay for a major expense, such as college tuition, a car, or someday a home that you own. You repay in installments, on a regular schedule. When you pay off what you've borrowed, the loan ends. If you need to borrow again, you apply again. Learn more about loans.
  • You can use a credit card to borrow for everyday expenses and for emergencies you haven't planned for. When you use your card, you get a billing statement that includes what you must repay and when payment is due. Learn more about credit cards.