Credit: A Primer

Suppose you have a friend who asks to borrow some money. Most likely, unless you got trust issues or you’re just heartless, you’d probably help them out. You have faith that they’ll pay you back eventually.

This trust you put in others to repay borrowed money is the notion of credit.

Now suppose the person asking you is really unreliable and loves to recklessly gamble it. Let’s call this definitely fictional character Ardelle¹. Well, you probably won’t lend Ardelle your money because you know that you’ll most likely never see that money agin.

Credit Score

To help determine who we want to lend money to, let’s come up with a system to score how much faith and trust we place in someone to repay us. Let’s refer to this as a credit score. If someone is reliable and has a good track record, let’s say they have a high credit score. And Ardelle, well, she has a shit credit score.

If someone has a good credit score, you’d feel pretty comfortable lending money to them.

Now what do we do about the trash credit score friends? Apart from the obvious answer of find better friends, you probably wouldn’t lend them any money at all, and if you did, you’d keep keep it minimal and probably ask for payment soon since it’s riskier.

The Mental Model

• Core Idea 1: Credit is the idea that we lend money to others with a degree of trust that they will repay us
• Core Idea 2: A credit score is the way we measure how likely someone will pay back their debt – A measure of risk.
• Core Idea 3: Don’t give money to Ardelle

Despite the simplicity of the scenario, the above provides a surprisingly accurate framework for understanding the core fundamentals credit, which will later extend into more involved topics later!

We’ll keep this blog post short and easy to understand for now. In a future blog post, we’ll go over the concept of interest, and look into the importance of having a good credit score.

1. I’m joking Ardelle if you’re reading this, but for real, this is what you get for using a debit card all those years and refusing to get a credit card to build up your credit score. ↩