Millennials, how much do you know about credit?

The concept of credit may seem like a modern day invention but it is believed that crediting is as old as the invention of the wheel.

The earliest known instance of crediting happened in Sumer (modern-day southern Iraq) 3500 BC. In the year 1800 BC, the first known laws surrounding credit, The Code of Hammurabi, was written in Babylon.

In 50 BC, philosopher Cicero of The Roman Republic penned an account of his neighbour purchasing land through the use of credit.

Modern cred reporting, however, is believed to have originated from England in 1803, involving a group of English tailors.

What is credit? 

Do not despair if you are not entirely sure of this term.

Simply put, credit is borrowed money from banks and financial institutions that is paid back at a later time, which normally includes both the interest and the principal sum.

This is in contrast to debit, whereby goods and services are paid with money that you currently own or possess.

A significant advantage of paying through credit is the ability to pay for something that you otherwise might not be able to.

For example, if you want to study in a university but do not have the tuition money as required, you can take a student credit loan to finance your education.

Today, credit is inseparable from our daily lives and we often need it for big item purchases.

If you intend to buy a car or a house, the most common option is to take up a credit loan from a bank.

Different types of credit products

There are two types of credit products: secured credit and unsecured credit. Secured credit is defined as a loan that is tied to a collateral.

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Collateral is an asset pledged as security for the repayment of a loan. Should you fail to make payment in time, the collateral will be forfeited.

Some examples of secured credits are vehicle loans, housing loans, secured credit cards and secured overdrafts.

Conversely, unsecured credit is money loaned that is not pegged to a collateral.

Some examples of unsecured credits include renovation loans, study loans, unsecured credit cards and unsecured overdrafts.

When you apply for credit, be sure to know what type of credit you are applying for.

Repercussions of poor credit behaviour

After you have been granted credit successfully, it is very important to ensure that the payment is made in full and on time.

If you do not, a late fee and an interest will often be charged.

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If there is a prolonged period of partial and late payments, you could incur a debt that may very well go out of control.

Furthermore, if you are unable to make complete and punctual payments, your credit payment records will be tainted.

This, in turn, will affect your credit score.

A poor credit score will discourage credit lenders from providing you with any future loans.

Before you sign up for a credit card or take up a loan, be aware of the terms and conditions of your credit application.

Follow it closely to avoid incurring an enormous debt. 

Advantages of exemplary credit behaviour

On the flip side, there are multiple rewards and advantages to having a good credit behaviour.

Aside from not having to worry about accumulating debt, you are essentially building a positive credit reputation.

Banks and financial institutions will often offer better than usual interest rates on credit applications to those with a positive credit score.

Many credit card issuers often have a reward programme that can be very attractive.

This comes in the form of cashbacks, vouchers, vacations, air miles and more. 

Conclusion

Now that you are aware of what credit is, you might want to learn more on how to build a great credit reputation.

This article was first published in SingSaver.com.sg.