In 2009, Ben Bernanke (the former Chairman of the Federal Reserve Bank) delivered a paramount plea to the federal government requesting the immediate signing of the Troubled Asset Relief Program (TARP). Although complex, one of the key goals of TARP would be “bailing” out a desperate Wall Street thus providing relief to the entity that, in many respects, was the catalyst for the 2008 Recession. So, as Bernanke spoke with conviction he echoed a consequence that the United States would incur should a crucial, yet often overlooked, component of the economy fail. His words were, “Credit has the ability to build a modern economy, but lack of credit has the power to destroy it.” Compelling, it would be this sentiment that pushed the signing, and ultimate passage, of TARP. As I reflect upon Bernanke's statement further, it has become clear, to me, that the future of the both the United States and global economy rests in the hands of credit.
So, what is credit? Credit is the money that a lender (often a bank) makes available to a borrower (you) with the understanding that the borrower (again, you) will repay the money at a future date. A well-known, and frequently acquired, source of credit is a credit card. Compact and easy-to-use, credit cards allow for the borrowing of money to subsidize purchases, which can be essential to everyday survival or for miscellaneous purposes. One is allowed to make these purchases so long as it is done within one’s credit limit, and the money is repaid within 25 - 30 days (monthly). When a repayment is not made within that time period, interest (the percentage of what is owed plus what you borrowed) is added. When exploring the role credit cards have played in the financial lives of Americans, it has been noted that 18 year olds are the heavily sought-after demographic to lure into signing up for one. Moreover, it has also been noted that, on average, the total amount of credit card debt among American is $16,000, which is a composite of borrowers 18 years old and older. Although this figure continues to climb in conjunction with average household debt, should one be excited at the thought of possessing a credit card, such excitement should be supported. However, it is imperative that before any signing on dotted lines occur, learning credit card terms and definitions is carefully done. In my work, I attempt to steer clear of making assumptions regarding my audience and their knowledge of finance. However, I am going to take a risk and confidently state that I am certain that a majority of readers have seen the term Annual Percentage Rate (APR) referenced in overall aspects of finance, ranging from credit cards to loans (auto, housing, and educational). However, when solely examining credit card APR, it is defined as the yearly rate of interest on one’s credit card. To further illustrate how credit card APR is calculated, Discover provides customers with a detailed explanation, “Let’s say you have a balance of $1,000 on your credit card, with an APR of 18 percent. If you hold that balance over a year, the total interest paid annually is $180. You would pay that $180 divided over 12 months, resulting in a monthly interest payment of $15.” Another term to familiarize oneself with throughout the credit card process is fees. Fees are the charges made to your account and include, but are not limited to, annual fees, balance transfer fees, cash advance fees, late payment fees, and over-the-limit fees. From the paragraphs above, it is evident that the research surrounding credit and credit cards is extensive, exhaustive, and yet informative and necessary. Once you have become better acquainted with terms, investigating which credit card is best for your financial needs is next. Moreover, examining the advantages and disadvantages of credit cards is strongly suggested. To start, some of the advantages are that credit assists in making purchases sooner rather than having to save for an unspecified amount of time. Likewise, utilizing credit helps to eliminate the need to carry cash or checks, thus simplifying your life. Furthermore, using credit helps in establishing a “credit history”, which can make it less expensive to use credit in the future. Essentially, those with a good record of using credit (making payments on time) may be able to borrow money at a lower interest rate than those with a poor credit history. Conversely, some of the consequences of mismanaging credit is that it can be costly, resulting in long-lasting and serious damages to your financial life. Because obtaining credit is fairly easy, and making multiple purchases without tracking expenses is common, meeting monthly repayment requirements is difficult. Moreover, borrowing too much money can result in one struggling to make minimum payments. Additionally, while having a great credit history can sometimes lower interest rates, contrarily, having a bad credit history can raise interest rates. It also worth noting that the failure to repay credit card debt can result in late fees, higher interest rates, garnishment of wages, and more. Although crippling, there are laws in place to protect you and your financial life.
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