The good, the bad, and the important things to know about credit.
The world seems to run on credit nowadays. Many of us have school, car and even home loans. And we likely all have one or more credit cards in our wallet. The problem is we don’t give credit the amount of thought we should.
At its best, credit can help us manage our financial lives. At its worst, it can get us into serious financial trouble.
Your credit history is something that stays with you for a long time and can impact everything from buying a home to getting a job.
It’s an important source of information that people who grant loans use to determine if they’ll lend you money, how much and under what terms. The better your credit history, the more likely you’ll be able to obtain the financing you need at favorable terms. So, needless to say, having good credit is of great importance.
What exactly do you need to know?
Let’s start with a quick test. In your opinion, which of these statements about credit is true?
- Credit is the temporary use of someone else’s money…
- Credit is a measure of your financial trustworthiness…
- Credit is a financial obligation you have to repay…
- Credit is debt accumulated from a credit card or loan…
You’re right, it was a trick question. All of the statements describe credit. Credit is any debt you’ve accumulated either from using a credit card, borrowing through a student loan or car loan, a line of credit, mortgage, home equity loan, or personal loan.
Basically, having credit means you’ve been given the ability to borrow money from someone and you’ve agreed to pay it back over time, usually with interest.
Having a cell phone account or an apartment lease doesn’t mean you have a credit history. While you do need to pay your phone bill and your rent, doing so doesn’t have much of an impact on your credit rating. The twist? NOT paying those things could show up negatively on your credit history because you’ve failed to pay as agreed.
Why having good credit is important
This probably isn’t anything you don’t already know. But it’s all worth repeating. Among other things you may need good credit to:
- Qualify for various education loan programs such as Federal PLUS and private loans
- Get the job you want
- Obtain affordable insurance
- Achieve financial goals like buying a home or financing a professional practice
Simply, your credit history is one of the primary tools that credit grantors use to determine if they’ll lend you money, how much, and under what terms. It makes sense that the better your credit history, the more likely you’ll be able to obtain the financing you need at favorable terms when you need it. And it’s important to think about the future. You don’t want your credit history to get in the way of achieving personal or professional goals.