There are many things in life that the school system should teach us but doesn’t teach us. Credit is ABSOLUTELY one of them. If you're reading this, you’re in the right place. Credit is absolutely vital in life. Not having it or having a low score will be a major detriment. But having a great credit score and understanding how it operates will help you immensely.
Personally, I think that it’s important to have a basic understanding about how something works before you can adequately use it. In this article, I want to explain what Credit is as concisely as possible.
What is Credit?
Credit is a tool that allows you to borrow money and then repay it, usually in monthly installments. If you have good credit, it means that lenders and creditors are more likely to approve your loan applications than if your score was poor or nonexistent.
Your credit score is essentially your financial reputation. A good reputation means that you’re credible when it comes to loaning money. And a bad reputation means you’re not likely to pay back a debt. Think about it this way… Do you have a friend that always asks for money but never can pay it back? This person would have a low credit score. Now, do you know a friend that rarely asks for money but quickly pays it back in full if they do borrow some? They’d have a high credit score.
Most people don’t often talk about this but credit isn’t only helpful, it’s often necessary for basic standards of living. For example, many apartments won’t let you rent a unit without a credit score. Some jobs even check your credit to determine if you’re even worth an interview. If you don’t have a credit score, I recommend checking out this article. Get a credit card TODAY if you don’t have one.
A Credit Score is a Number that Represents your Creditworthiness
A credit score is a number that represents your creditworthiness. It's the result of a mathematical formula based on your history of borrowing and repaying money. The higher it is, the better.
Your score determines whether or not you can borrow money and at what rate; it also lets lenders see how much risk they'll take on by giving you credit in the first place. Your score can affect things like:
Whether or not you're approved for a mortgage loan
How much interest you must pay on an auto loan
How much rent or community fees are due each month
The maximum credit score you can have is 850. The lowest is 300. With a 300 credit score, most credit cards won’t approve you, most car dealerships won’t sell to you, you’ll likely be unable to apply for a mortgage, and many apartments won’t rent to you. Now, getting a 300 credit score requires effort. Even if you do everything wrong, you’ll likely hover around a 500 credit score. However, it’s good to understand the absolute floor when it comes to what your score can be. On the other hand, an 850 score can open massive doors to you. Many credit cards will offer rewards, exclusive deals, and access to events. To have a perfect credit score is fairly difficult. Personally, I don’t think it’s worthwhile to obsess over having a perfect score. Simply having a score in the high 700s and low 800s will grant you the best return on your time and effort investment.
Also note that your score will fluctuate so don’t overinvest into the score. Just make sure it’s in the higher range.
What is a Credit Report?
A credit report is a detailed history of your borrowing and repayment activity across all payment types.
A credit report is a detailed history of your borrowing and repayment activity across all payment types. It includes information about your credit history, such as how much credit you have available, whether you pay your bills on time, and how many times you've applied for credit.
The three major credit bureaus – Equifax, Experian and TransUnion – collect information from creditors and use it to generate your reports. Each bureau generates its own report based on data provided by the same set of creditors that supply information to all three bureaus.
What is a Credit Card?
A credit card is a tool that allows you to borrow money and then repay it, usually in monthly installments.
A credit card is a tool that allows you to borrow money and then repay it, usually in monthly installments. This is useful if you don't have enough cash on hand to pay for something now but would like to own it later.
If you use your credit card wisely, a good credit score can help you get better interest rates on loans (like mortgages), make it easier for companies to accept your application for financial products (like home improvement loans), and could even help open doors if you're looking for a job or an apartment.
How to Use Credit Cards Wisely
If you’re going to get a credit card, it's important to know that using a credit card for your everyday purchases can help build good credit. However, if you don't pay off the balance every month and pay only the minimum payment due on your statement (which is usually 2–3% of your total balance), then you'll begin accumulating interest charges.
If this happens, it will take longer to build good credit because even though you're paying off some of what you owe each month, there's still a balance accruing interest.
Try not to carry over a balance from one month's statement to another—this will increase how long it takes before having good credit shows up on your report.
Paying just the minimum payment due is one of the worst things that anyone can do when trying to build good credit! It won't help at all because most lenders report only new activity such as opening new accounts or making changes like increasing limits or adding an authorized user; they don't report whether someone has paid their bill in full every single month without fail (if they did so once or twice by mistake).
If you haven’t already, I highly encourage you to check out my article on What a Credit Score is Composed of here.
If you want to build or maintain good credit, it’s important that you manage your finances responsibly. One way to do this is by keeping track of all payments made on time and paying off debts as soon as possible. Once you have a solid credit history, lenders are more likely to trust that they will get paid back if they decide to lend money or provide their services to you at reasonable rates.
Again, I want to encourage you to get credit as soon as possible and keep it on track. My general rule is to never use more credit than you have available in your checking account. Of course, there are more advanced techniques you can use but I don’t think the advanced techniques are necessary for the majority of people.
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