What Is a Credit Transaction?

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A credit transaction is a common financial activity, often conducted with a credit card. Credit gives you the ability to buy things you cannot afford to pay for all at once, and you can also use it for convenience. You must eventually pay the money back, and most credit purchases incur interest charges in addition to the original amount.

Definition

  • Credit refers to the practice of borrowing money to make a purchase. Loans are a form of credit, and consumers commonly use them to buy houses, cars, motorcycles, boats and other expensive items. Those transactions are known as installment loans, because they are for a specific amount and are repaid on a predetermined schedule. Credit cards are linked to revolving credit lines that let you borrow money as needed in varying amounts, up to your preset spending limit.

Installment Transaction

  • You fill out a loan application to open an installment account for a major purchase. The lender reviews your credit reports and verifies other data, like your employment and income. Many lenders also check credit scores, which summarize your creditworthiness based on your credit reports. You get the loan if you meet the criteria, then pay it back monthly as agreed.

Revolving Transaction

  • Credit cards require an application, but the repayment schedule is based on your usage of your revolving credit line if you get approved. You can use your credit cards anywhere they are accepted. Branded cards like Visa and MasterCard are accepted by many stores and service providers. Gasoline and store cards are only accepted at affiliated gas stations and retailers. You show your card to pay for the goods and sign a sales slip when doing a transaction in person or fill out a form to buy something online. When you get the bill, you can either pay it in full or send at least the minimum required by the card issuer each month until the total is paid. You also pay interest if you spread out repayment.

Effect

  • Credit transactions affect your credit reports, because lenders report your outstanding debt to the TransUnion, Experian and Equifax credit bureaus. Revolving debt has the biggest effect, as you lower your credit score if you spend more than 30 percent of your credit limits, according to MSN Money writer Liz Pulliam Weston. Owed balances account for almost a third of your total credit score. Your credit card transactions are declined if you try to spend more than your credit limit.

References

  • Photo Credit Burke/Triolo Productions/Brand X Pictures/Getty Images
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