Tips and Tools For Financial Success - Newton Free Library

Overview of Credit (from FDIC Money Smart)
Credit Defined
Credit is the ability to borrow money. When you borrow money on credit, you get a
loan. You make a promise to pay back the money you borrowed plus interest, which
is an extra amount of money a financial institution charges for letting you use its
money.
Credit is important for a number of reasons:
• It can be useful in times of emergencies.
• It is sometimes more convenient than carrying large amounts of cash.
• It allows you to make a large purchase (e.g., a car or house) and pay for it over time.
• Prospective employers, landlords, and insurance companies may look at how well you manage credit.
Credit is a loan often secured by collateral or a guarantee. Collateral is security, or an
asset that you provide the lender. Giving the lender collateral means that you pledge
an asset you own (e.g., your home) to the lender with the agreement that it will be the
repayment source in case you cannot repay the loan.
Credit Case: Marvin’s Desks
Marvin makes writing desks and sells them for extra money. He wants to borrow
$1,000 for a new band saw and an electric sander. He obtains a loan from the bank
and pledges his new equipment as collateral.
If Marvin does not (or cannot) pay back the loan, what will the lender probably do?
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