Credit is money a bank lends us to finance our expenses. Depending on our needs, we can get many types of credit through an agreement with a financial institution for a certain amount of liquidity that we should pay back with interest over a set time frame.
Upon checking her bank accounts, María decides she wants some more liquidity. What can she do? The first thing she thinks of is consulting her bank to apply for credit. The "You and your first credit facility" guide in Santander Spain’s Finanzas para Mortales (‘Finance for mortals’) programme could really help her.
What is credit?
Credit is money a financial institution lends a customer for a set period. The customer may receive the amount as a lump sum or in instalments paid into a bank account or put on a credit card for them to manage based on their needs.
Credit is not an unlimited source of additional income. It binds the borrower to pay off their principal (i.e., the actual amount borrowed), plus interest and fees, like with annual credit card payments. It is granted for a set term and intended to cover ongoing or extraordinary expenses over certain periods.
What are the most common types of credit?
Credit is like a large, diverse family. It can fit the needs of individual or company borrowers and includes online credit; quick, one-off loans for small amounts; revolving credit (which can be used repeatedly up to a limit, like a credit card), mortgages to buy a home; or student loans to pay tuition fees. You can find definitions for these and other financial terms in Santander Chile’s Dictionary on the SanodeLucas website.
What do credit cards provide?
Borrowed funds can be spent on a credit card, as explained in Finanzas para Mortales about types of cards. The bank gives you a plastic card with a monthly spending limit so you can make purchases with the funds it has loaned you, which you must pay off at the end of the month or be subject to interest charges. This infographic by Santander Mexico shows certain conditions you should consider if you apply for a credit card.
What should we consider when seeking credit?
Before applying for credit, we should pay attention to:
When should you apply for credit?
While applying for credit can make life much easier, we should think about if it’s the right time to apply, as explained in SanodeLucas. You might want to borrow money to invest in your children’s education or renovate the kitchen.
This infographic by Santander Mexico tells you when you should and shouldn’t apply for credit. Santander UK’s The Hub website also tells us why it’s not advisable to apply for credit when we’re already using our income to pay off debt. Having good credit history will help you gain access to other credit and better conditions in the future.
What do ‘credit’ and ‘debit’ mean?
When talking about credit from a financial institution (like credit cards), it is important to differentiate it from debit, which is the money we actually hold in our bank account and can spend with a debit card. Don’t miss this video by Santander Mexico that talks about the pros and cons of debit and credit cards and other methods of payment.
What is the difference between a loan and credit?
A loan is a contract with our bank. What does it involve? The bank lends us a fixed amount of money in exchange for a guarantee of payment we provide, like the house or car we buy with the loan. But, if we take out credit, we can use all or part of the extended amount and renew it (which we can’t do with loans).
You can find out more about the difference between loans and credit in the Openbank blog.
Remember: Using the tools banks give you responsibly, including credit, can help you achieve your financial goals.