Capital One - Credit Basics

CREDIT – WHAT IS IT? Text Version

To put it simply, credit is a way for you to buy stuff today (either goods or services) and pay for it later. Typically, credit comes in the form of loans, mortgages, lines-of-credit or credit cards and, is provided by a bank or other financial institution. In exchange for letting you pay later, the provider may charge you interest on top of whatever you owe for your stuff if you don't pay it off within your grace period.

Here's a little more info on the most common types of credit:

  • Loans: A loan is where you borrow a certain amount for a certain period of time at a certain rate of interest. The most common types of loans are:
    • Unsecured loans: This is what we call a personal loan. People usually use these for big purchases like a car. They're supported by your credit worthiness rather than backed by collateral, which means the lender is trusting you to pay it back without the need for security.
    • Secured loans: With these kinds of loans, your property or another asset are used as collateral on top of your credit score. If you can't pay back the loan, the lender can take whatever you put up as collateral to help repay the loan.
  • Mortgages: The go-to when you want to buy a home or property. Mortgages use the property as collateral, so if you can't pay, you could lose your home.
  • Lines of credit: It's like a bank account, only you pay interest on any money you withdraw. Also, any money you pay back is available to you again to borrow.
  • Credit cards: These are issued by a bank or credit card provider like Capital One, and are designed to pay for things in stores or online. You can also use them for balance transfers and taking out cash (also known as a cash advance or cash withdrawal) from an ABM.