Credit 101

Interactive Video

[A man filling out a loan application on his laptop.]

[An outline of the state of California with a pile of gold crossed out.]

Narrator: During the Gold Rush, in the mid-1800s, more than 300,000 people came to the area around Sutter’s Mill in Northern California. Most people who came to the area expected to get rich quickly. When that didn't happen, they had to turn to credit.

[Background image of an old mining town with a Mercantile building, Sheriff building, and Forge building. A circular graph that shows the cycle of using credit to borrow tools and repaying with gold.]

Prospectors without money relied on credit from merchants to buy supplies and equipment. Merchants wanted to be repaid with gold or other valuables once their customers struck it rich.  

[Henry Comstock with a speech bubble that says, “I’d like a loan.” Abe Curry with a speech bubble that says, “It’s a deal.” The outline of Nevada with a building that represents the mining operation.]

In 1859 a prospector named Henry Comstock discovered a large gold and silver ore deposit in Virginia City, Nevada. Comstock got a loan from a merchant named Abe Curry to finance the mining operations. Both Comstock and Curry became very wealthy men off one of the most productive mines in United States history because of credit.

[Four images: a woman purchasing a new car, a couple standing in front of a house where a real estate agent is putting the word “Sold” on a “For Sale” sign, a college graduate holding his diploma wearing a cap and gown, a business owner writing “Grand Opening” on a chalkboard.]

[On screen text]: When you use credit or borrow money, you have to repay it later.

Borrowing money has its purposes. It allows people to do things they otherwise couldn’t afford. But here’s the key you can’t forget: When you use credit or borrow money, you have to repay it later. And always remember that borrowed money (or debt) will accrue interest and fees over time, all of which you are expected to pay.

[On screen text]: There are three main types of credit. Select each type. 

Option 1: revolving credit 

Description: 

• Borrow money up to a certain limit.
• Pay it back over time.
• Add to the balance without hitting the maximum.

Examples: 

• credit cards
• home equity lines of credit]

With revolving credit, you can borrow money up to a certain limit and then pay it back over time. You can continue to add to the balance at any time as long as you haven’t hit the maximum.  Examples include credit cards and home equity lines of credit.

Option 2: installment credit

Description: 

• Borrow specific amounts with collateral.
• Pay it back on a schedule.
• Pay fixed amounts over a set term.

Examples: 

• student loans
• car loans
• mortgages]

With installment credit, you borrow a specific amount, often with collateral, and pay it back on a regular schedule in a fixed amount over a set term. Examples include student loans, car loans, and mortgages.

Option 3: open credit

Description: 

• Borrow money at any time.
• Timely repayment is required.

Examples: 

• utility bills
• credit cards with no set limits]

With open (or demand) credit, you borrow money at any time as long as repayment is timely; examples include utility bills and credit cards with no set limits.

[A woman holding her computer in one hand and several $100 bills in the other.]

[On screen text]: Lenders must be confident that the person they are lending to will be able to pay off the loan. 

[A silhouette of a lender with one arrow pointing to a credit report with a score of 590 which lists 1 late payment and 3 on-time payments. The other arrow is pointing to a thumbs up and a thumbs down emoji.]

Lenders don’t give money to just anyone who wants it. Because lending money is risky, they must be confident that the person they’re lending to will be able to pay off the loan. They review a borrower’s past behavior, usually with a credit report, as a way to predict future behavior.

[A person making a purchase on a card reading machine by using the tap feature. The same person paying their credit card bill online.]

Having credit doesn’t immediately mean you have debt though. For example, you can use credit for convenience to make purchases, then pay the full amount each time your bill comes due. You're buying something you can afford now, but you're paying for it later.

[Eight People with one thought bubble that contains a revolving credit icon, open credit icon, and an installment credit icon. A finger with a ribbon tied around it.]

[On screen text]: Credit is not a problem if used wisely.

Most people will need to use some form of credit at some point in their lives. Credit is not a problem if used wisely.