What is Credit? - Interest Rates and Debt - Part 4

One of the key aspects of understanding credit is the concept of interest rates and debt. Interest is the cost of borrowing money, usually expressed as a percentage of the loan amount - known as the interest rate.

Interest rates play a significant role in determining the overall cost of your credit. Lower interest rates make the credit cheaper to repay, while higher rates make it more expensive. Interest rates are often directly tied to your credit score: the higher your score, the lower your interest rate, and vice versa.

Debt, on the other hand, is the amount of money borrowed that is yet to be paid back. While credit provides us with the ability to purchase goods and services that we might not be able to afford outright, it is crucial to remember that it is essentially debt that we are taking on.

Taking on too much debt can lead to a slew of financial difficulties, including a negative impact on your credit score. The key is to use credit responsibly, ensuring you can manage your debt and make timely repayments.

Understanding interest rates and the concept of debt is crucial to navigating your financial landscape and making sound decisions that align with your financial goals. Our next topic is managing credit.