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Learning the basics of credit and why your reputation for paying back money matters.
If you asked to borrow your friend's favorite video game, would they say yes? Their answer usually depends on one thing: your reputation for taking care of things and giving them back!
Imagine you want to buy a new bike today, but you don't have all the money yet. Credit is a 'buy now, pay later' system. When you use credit, a bank or store gives you the item now because you make a promise to pay them back in the future. This is very different from a debit card. When you use a debit card, the money is taken out of your bank account immediately. With credit, you are essentially taking a small loan that you must pay back by a certain date. If you don't pay it back on time, the bank might charge you extra money called interest.
1. You go to a snack stand and want a 2 is instantly gone from your savings. 3. Credit Path: The stand owner gives you the apple for free today because you signed a paper promising to bring $2 tomorrow.
Quick Check
If you buy a $15 shirt and the money leaves your bank account the very same second, did you use credit or debit?
Answer
Debit
How does a bank know if they can trust you? They look at your credit history. Think of this as your Financial Report Card. Just like a school report card tracks your grades over time, your credit history tracks every time you borrowed money and whether you paid it back on time. If you always pay your bills on time, you get a high credit score (like an 'A+'). If you forget to pay or pay late, your score goes down. This 'grade' stays with you for years, telling the world how responsible you are with money.
1. Student A returns every library book on time for three years. Their 'Library Credit' is perfect. 2. Student B loses two books and returns others late. Their 'Library Credit' is poor. 3. When a very expensive, rare book arrives, the librarian only lets Student A borrow it. This is how banks use your credit history to make decisions.
Quick Check
True or False: Your credit history only shows the money you borrowed today.
Answer
False. It is a history of your behavior over a long period of time.
It’s not just banks that care about your credit history. Many people, called lenders, check your 'financial grade' before they decide to work with you. Landlords check it before letting you rent an apartment to make sure you'll pay rent. Cell phone companies check it before giving you a data plan. Even some employers check it when you apply for a job! Having a good credit history makes life easier and cheaper. If your score is high, banks might charge you less interest. For example, instead of paying percent interest, you might only pay percent.
Imagine two people borrowing to buy a bike. 1. Person A has a great credit score. The bank trusts them and charges interest. Total cost: . 2. Person B has a bad credit score. The bank is worried, so they charge percent interest. 3. Calculation for Person B: . 4. Person B pays more than Person A for the exact same bike because of their credit history!
Which of these is the best definition of 'Credit'?
Who is most likely to look at your credit history?
Using a debit card helps you build a credit history.
Review Tomorrow
Tomorrow morning, try to explain to a family member the difference between a 'promise to pay' (credit) and 'paying right now' (debit).
Practice Activity
Ask an adult to show you a 'bill' (like a water or electric bill). Discuss what happens to their 'financial report card' if that bill is paid late.