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OBTAINING AND USING CREDIT
At times, businesses, governments, and consumers borrow money. Whether the amount borrowed is large or small, being able to borrow money at a time of need is an important aspect of economic system.
Credit is the privilege of using someone else’s money for a period of time. The credit transaction creates a debtor and a creditor. Anyone who buys on credit or receives a loan is known as a debtor. The one who sells on credit or makes a loan is called the creditor. The credit system uses forms and legal documents but it also depends on trust between the debtor and a creditor.
When you borrow a large amount of money or buy on credit from a business, you usually will be asked to sign a written document. The agreement states that you will pay your debt within a certain period of time.
There are some types of credit: loan credit, sales credit and trade credit.
Lenders (creditors) expect to be repaid along with interest and other fees for letting you to use their money. No wonder lenders check the credit history of loan applicants to determine if they are credit worthy.
In judging a person’s credit worthiness, lenders often look at the "three Cs” of credit: character, capacity, and capital.
Character refers to your personal qualities – your honesty and willingness to repay debts. If your record shows you have paid your bills on time, lenders will assume you will continue to do so in the future.
Capacity is a measure of your ability to repay debts. Creditors will want to know about your income sources, how much you earn, and your other financial obligations.
Capital refers to what people own – money in the bank or property. In general, the more you own, the easier it is to repay debts.
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