How does credit work?
You want to buy something now but pay for most of it over time. You need somebody to lend you money in order to pay the seller now, and then you agree to make regular payments to pay amount borrowed back, plus interest.
To build your credit, you start by proving you can manage a small amount like a credit card with a small limit. Over time, by taking on more loans (additional credit cards, car loans, student loans) and paying them back on time, you’ll improve your credit score. This will allow you to borrow larger amounts and with lower interest rates.
A credit card works like a small loan that you can borrow from whenever you like to buy just about whatever you want. You use your card in a store or online, the bank buys you your stuff and you pay them back by a certain day of the month. Any money you still have owing at the end of each month will be charged interest.
You’re given a credit limit, the maximum total amount of money that you can borrow at any time. If you’re young and don’t have much history paying back debts, you’ll start with a small amount. Once you’ve proven that you’re responsible by paying the card back on time, you could be offered a higher limit.
If you leave a lot of that debt unpaid for a long time, it becomes almost impossible to pay back so it’s important to use credit responsibly.
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You want borrow your friends legos until you get your LEGO’s set soon , he says okay but I’m charging you 5 of your lego pieces a week until you give me all my legos back . Now if your not careful and take too long to pay the legos back you will eventually end up paying many sets of legos 5bricks at a time all just to borrow one set .