What is credit?

Credit is a sum of money that is made available for you to borrow.

People use credit for all sorts of reasons. Credit can help when making a large purchase or if there is a sudden emergency. It can also provide protection if, in the case of any Visa payment card purchases, you are unhappy with an item or if your card has been used fraudulently.

home mortgages There are two main types of credit:

Fixed-repayment loans can be home loans, or mortgages, or personal or shop loans that are linked to a specific item or items and calculated over a set period Revolving credit on payment cards can give you access to a fixed amount of money that you can spend as you wish in a wide range of retailers and other outlets.
Repaying credit
Fixed-repayment loans are normally repaid in regular instalments over an agreed period of time. Mortgages can be repaid in variable instalments but most personal loans specify fixed repayments of approximately equal amounts. If you want to make another major purchase when you have finished paying off one loan, you need to negotiate a new loan.

Revolving credit means that you always have access to the credit that remains unspent. And every time you pay off some of the outstanding amount, that proportion of your credit limit becomes available for you to spend again. For example , if you have a credit limit of €1, 000, spend €300 and repay €100, you will have €800 available to spend.

Whichever type of loan you choose, be certain to make your repayments on time to avoid facing financial penalties.

Credit interest
In order to cover the lending risk, lenders generally charge interest on loans and revolving credit. It is important to take interest into account when calculating your repayments.

For example , if you borrow €100 and interest is payable at an annual rate of 10 per cent, the total cost is €110. This is known as simple interest and is rarely charged on borrowings.

It is more common for lenders to charge compound interest, which means that interest is calculated on the amount you owe at regular intervals.

In this case, if you owe €100 and are charged 10 per cent compound interest each year, at the end of the first year you will owe €110. In the second year the lender will charge 10 per cent of this sum and add it to the outstanding amount, so you will owe €121, and so on. Interest may be compounded after any period – a day, a week, a month and so on.

With fixed-repayment loans, the amount of interest is worked out in advance and added into the repayments. There is often a penalty if you want to repay the outstanding amount earlier than agreed.

With revolving credit, you can repay as much or as little as you want, at any point. You can often avoid paying any interest at all if you repay the total amount you have borrowed on the date when the first repayment is due.