005: Money Basics: Credit

In last episode we talked about Debt. Credit and debt go hand in hand. So what is the difference?

Credit is your ability to take on debt, while debt is the actual amount that you currently owe to creditors. In general, you are in a much better financial position if your available credit far exceeds your current level of debt. Credit is the ability to borrow money, while debt is the result.

In our everyday life, credit cards are the most typical form of debt. Credit card itself represents amount of credit you can borrow.

For example: When you make $100 purchase using a credit card, you are now $100 in debt to the bank. The more you spend the larger your debt becomes. The minute you pay off credit card, your debt shrinks. In essence, credit is nothing more than the ability to create debt. Now whether you use your credit wisely is the discussion for the another episode.

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