How Does Credit Work?


Quick Answer

Credit works via a person borrowing money from a creditor and paying it back over time. Credit cards are the most common form of credit, and the borrower usually pays interest on the credit card balance. Credit bureaus track relevant information, such as owed balances, delinquent payments and timely payments.

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Full Answer

Credit card companies approve or deny an applicant based on his credit history. The credit bureaus TransUnion, Equifax and Experian track and store credit history. This information is processed by computers and is used to assign a person a credit score. Credit scores are always changing based on a person's financial activities.

Credit lenders view a potential borrower's credit scores to determine whether or not it is safe to lend to him. Low credit scores are often denied. To build credit, a person with low or no credit scores usually starts with a secured credit card, which means that he pays an initial deposit to prevent the lender from losing money if he fails to pay his balance.

Credit cards are essentially a loan that can be taken out in increments, at the credit card owner's leisure. When the borrower makes a payment, that much money is returned to his available borrowing limit. If the borrower goes over the limit, or does something that breaks the terms of agreement, he may incur monetary penalties.

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