How Does Credit Work?

What is a line of credit?

A line of credit is an amount of money provided by a lender, which and individual or lender can spend at will, either by credit or check, provided they pay some amount back each month.

What is an Interest Rate?

An interest rate is the amount by which a borrower’s debt increases each month. Interest rates are usually expressed as a percentage. Interest is how a lender profits from your credit line. The money a borrower pays in interest is collected by the lender as a fee for issuing credit.

The amount your debt will grow each month is calculated by taking the total balance and multiplying it by the interest rate. Fourteen percent is the average APR on new credit card offers. Thirty-six percent of credit card users say they didn’t know the interest rate on the card they use most often.

As you spend

As the borrower spends his or her credit line, they are responsible for paying it back. Payments are made monthly, in an amount at or above the minimum allowed payment. Fifty-four percent of American who said that they always paid their credit cards in full during the past 12 months.

Interest is compounded on the remaining balance, or p[aying less than the minimum payment can trigger penalties that add to the outstanding debt.

2 Different Types of Credit

Secured Credit Line: A credit card that requires you to promise collateral to receive credt. These cards are often sought by consumers with bad credit who may not qualify for an unsecured line. Common items used as collateral: cars, homes, businesses, stocks and savings accounts.

Unsecured Credit Line: Credit cards that are not secured by collateral. Customers qualify for such cards based on their credit history, their financial strength and their earnings potential.

How to Qualify for a Credit line

Individual: Lenders will perform a credit check on any individual applying for an unsecure line of credit. They also look into a borrower’s employment history and yearly salary. Lenders look at a borrower’s debt-to-income-ratio (DTI). This is a measure of the amount of debt the person already owes relative to their monthly income. Thirty-seven percent of American adults admit they do not know their credit score.

How to Secure Business Credit Cards

To qualify for business credit cards or other business financing, businesses need to present a lender with a strong tax return showing positive income and low existing debt. If your business has no tax return, you can secure the card with a co-signer. This could be you, any of your co-founders, or a friend with a strong solid credit history.

As of the end of 2009, 83% of small businesses used credit cards; 64% used small business cards, and 41% used personal cards.

5 Biggest Credit Card Issuers

• Bank of America: $194.70 Billion
• Chase: $184.09 Billion
• CITI: $148.90 Billion
• American Express: $105 Billion
• Capital One: $68.78 Billion