Credit is an indispensable part of modern life. In the form of credit cards, it is used to make everyday purchases, like gas and groceries. In the form of loans, it pays for big-ticket items like cars and homes.

Credit also makes paying for satellite television service and long distance phone calls much more convenient.

So, what exactly is credit? It is the ability to obtain goods and services by promising to pay a third party at a later date rather than paying for the item immediately with cash.

When a friend buys you a coffee and you promise to pay them back, you are using a simple type of credit. In more formal situations though, these payments typically occur at regular intervals and incur interest. Interest is the amount a borrower is charged for the use of credit.