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.
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.