Difference Between Credit and Debt

What’s The Difference Between Credit and Debt?

If you are new to finance, you will find the terms credit and debt cropping up often, and many times they are used to refer to what seems like the same thing. Before you get confused by these terms, you should evaluate what the differences between credit and debt are. When you need money, then you have to borrow it and being able to do so is known as credit. Anything that you borrow needs to be paid back, and until you manage to pay it back then you are in debt. When you are able to get a hold of your debt and manage it well, then you will find it becomes easier for you to gain access to credit. 

Breaking Down Credit

Credit has been acknowledged as the driving force of an economy, making it possible for people to spend actively. With credit, you have an idea of the amount of money that you are able to borrow. This means that you can make purchases, even when you do not have all the money readily available to you. Credit is often provided on a credit card, and it gives the owner of the card the chance to pay for a purchase using money that they do not have in the moment. This money then needs to be paid back later with installments that are split over time. When borrowing money in this way, you do not have an unlimited amount that you can use. Instead the financial institution that is offering you credit will set the total amount that you are able to borrow, or what is also known as your credit limit. To manage your credit, then you need to ensure that you do not spend in excess of what you can afford to pay back on a monthly basis. 

Understanding Debt

In the event that you have borrowed some money, you may need some time in order to ensure that it is paid back in full. When you have the money that has been borrowed or have used it without paying back, then this is known as debt. It is directly related to credit in an interesting way. For example, in the event that you have $500 credit, then you will also have $500 or more debt depending on the interest rates. When you start paying back the amount that you have in credit, then your debt amount will go down. The issues with debt arise when you take out way more credit that you are able to afford to pay back, and at this point, it is said that you are in debt. 

When you look at is from the eyes of a novice in finance, you may be tempted to believe that credit is good, while having any debt is bad. There are instances when debt is good and reveals that you can be responsible with money. For example, when you have a well-serviced business loan, it is debt that can show your ability to manage your finances. What you need to understand is that credit and debt do not work without each other. However, in some instances, it is possible to have credit and have no debt.

It is possible to find a workable balance between the two, and that requires you to analyze your income stream and make sure that you do not miss any payments that are due on your credit cards. Furthermore, you should ensure that all the money you need to require back is able to fit well into your monthly budget.

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CFD trading

How Does CFD Work?

When you go into trading, you will discover that there are different ways that you can trade. One of these ways is CFD trading. This is a form of derivative trading that has grown in popularity over time. Choosing to trade a CFD means that you are choosing to go into a contract so that you are able to exchange the difference in price of an asset. This will be from the time that your position opened until the time that it closed.

It is worth noting that you will not be buying or selling an underlying asset as you would with traditional trading. With CFD, you will be looking at buying or selling a certain number of units based on what you think will happen with the price movement. The instruments you will find when Online CFD trading includes shares, currency pairs, stock indices, treasuries, and commodities.

For this to work effectively, there are some concepts that you need to be familiar with as follows: –

Going Long

This is the description that is used when you believe that the price will go up so you choose to enter a contract. Basically, a rise in the price will result in a profit. The CFD should open and close on the same day when you are buying it. If it does not, then you will have to pay a daily financing charge in addition to the commission that is charged for the transaction.

Going Short

This is almost the opposite of going long. In this case, if you believe that the price is going to fall, then you go into a contract for this. In this case, you will make a profit in the event that the price falls through you will experience a loss if the price were to rise. In the event that the CFD does not open or close on the same day, then you will receive a credit in your account. The commission still applies for these types of transactions.

Duration

There is typically no fixed expiry for a CFD trade. When you place a trade in the opposite direction to the way that you opened it, then the position of that trade is closed. When you decide to keep a CFD position open once trading has ended, then you will be subject to an overnight funding charge. The only exception to this would be a forward contract as it will have an expiry date and the overnight charges will have been included in the spread.

Spread and Commission

Looking at the way CFD prices are quoted, you will note that there is a buy price and a sell price. The sell prices are normally lower than the current market price, with the buy prices being higher. It is the difference between the two that is known as the spread. There is a commission charge that CFD trades will incur. This arises when the trade is opened as well as when the trade is closed.

There are some key reasons that you may want to consider CFD trading for making your profits on various commodities. To begin with, it is possible to trade on margin. This means that you can go long or go short depending on what you believe will happen with the price. Furthermore, there is the benefit of not needing to pay any stamp duty when trading CFDs which means that they are tax efficient. CFDs are margin traded making it possible for you to take a larger position that you would with normal equities. This means that you can get a better return on investment.

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