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Learn about credit and why it's important.
What is credit?
Credit is usually defined as an agreement in which an individual can purchase something immediately and agrees to pay it off at a later date, generally with interest. Credit can also refer to the trustworthiness of an individual to receive this credit based on whether or not they successfully paid back their money in the past after buying on credit.
Types of Credit
The most popular form of credit is bank or financial credit. This includes car loans, mortgages, signature loans, and lines of credit. In this type of credit, a bank lends to a consumer and expects them to pay it back at a future date. A credit card is the most common example of this. Another type of credit is an exchange of goods or services in exchange for payment later. For example, when a supplier gives products to a business or individual but doesn't require payment upfront, that is a form of credit.
5 C's of Credit
The 5 C's of Credit are used by lenders to assess the creditworthiness of potential borrowers. The 5 C's are as follows:
1. Character: refers to a borrower's reputation or track record for repaying debts
2. Capacity: measures the borrower's ability to repay a loan by comparing income against recurring debts and assessing the borrower's debt-to-income (DTI) ratio
3. Capital: consider the amount of money the borrower puts toward the potential investment
4. Collateral: help a borrower secure loans and gives lenders assurance
5. Conditions: consider conditions such as interest rate, borrower's intended use of money, and state of economy
Quiz
Sources: https://www.investopedia.com/terms/c/credit.asp
https://quizlet.com/39037911
https://youtu.be/ijQTqa0no18
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