Credit Basics — What is Credit?

What is Credit?

Credit allows you to buy something now with an agreement that you’ll pay for it later. There are two basic types of credit:

  • Loans allow you to borrow money for a major purchase and pay it back over a set amount of time. You will also pay interest to the lender, which is a percentage of the total amount you’ve borrowed.
  • Credit cards allow you to make purchases without immediately paying for them, up to a maximum credit limit. If you decide to keep a balance and pay the money back over time, you will pay interest until the borrowed amount is repaid.

When would you need to use credit? Credit is important when you’re making a big purchase and want to spread the cost out over time. For example, if you need a car, but you don’t have enough money saved to pay the full price, then an auto loan will give you the ability to buy the car now while you pay for the car in monthly payments over a certain number of months.

Other common uses of credit include:

  • A student loan to pay for college (for yourself or your kids)
  • A credit card to buy a new appliance or a computer
  • A mortgage to buy a house
  • A small business loan to start or expand a business

When used responsibly, credit can help you achieve your short-term and long-term financial goals, like owning a home, buying a car, or going to college. For most of us, credit is an important part of financial life. That’s why it’s important to establish a good credit history.

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This site is for education purposes. The material provided on this site is not intended to provide legal, investment, or financial advice or to indicate the availability or suitability of any Capital One product or service to your unique circumstances. For specific advice about your unique circumstances, you may wish to consult a qualified professional.