What Exactly Is "Credit" and Why Does It Matter?
Boost your credit score. Repair your credit. Check your credit. You can't go a day without seeing or hearing something about how important it is to have good credit.
You're not the only one if you don't know what that means. Here are a few things to keep in mind as you establish and maintain an excellent credit score.
How Does Credit Work?
Credit is the trust you establish with lenders that allows them to consider you as a potential borrower. As a consumer, credit is your capacity to borrow money and demonstrate your dependability to someone else on the condition that you will repay them in the future. Your credit history indicates your trustworthiness. Therefore if you have "excellent credit," you've proven yourself to be a dependable borrower.
Because they haven't yet established their dependability as borrowers, those with little or no credit history will have a more difficult time obtaining acceptance to borrow money from a financial institution or lender. They may be fully capable of repaying a loan, but there is no credit history record to reassure lenders.
And even when you have a large amount of cash to work around, credit is still an essential part of your life. See the different types of credit, your credit score, and why they're necessary to know and understand.
Types of Credit
When used wisely, credit can be a handy and helpful way to manage finances. Your creditworthiness is determined by the different kinds of credit you use because this gives lenders different ways to judge how reliable you are.
And as our society becomes less cash-based and more convenient, there are more ways to borrow money. Check out these four ways you can get credit.
Revolving Credit
There are multiple kinds of credit, but revolving credit is one of the most common types of credit. The lender gives you a credit limit when you have revolving credit, often based on how good your credit is. The lender can raise or lower your credit based on small things like how well you've paid your bills in the past.
When you pay back the money, they will usually add interest fees. Each month, the difference between your maximum credit limit and your current balance is available for you to borrow again. Though if you're to build your credit history, it's best if you pay off your balance in full every billing cycle. It will keep you from going into debt.
Installment Credit
The borrower agrees to pay a fixed sum back with an installment loan. Mortgage loans, car loans, school loans, and other personal loans are all examples of installment credit. Interest rates on installment loans tend to be more stable than interest rates on revolving credit, which might change often.
Service Credit
Service credit loans, often known as non-installment loans, allow borrowers to later pay for services or subscriptions. If the borrower fails to pay, the service you receive will stop. Creditors expect you to pay back the money according to their terms. If you take out credit but don't pay back what you owe, you could face financial penalties and damage to your credit score and history.
Why is Credit Important?
Like we said before, a strong credit history provides you with the financial power and opportunities you wouldn't otherwise have. While it's nice to daydream about showing up at a luxury car dealership or a real estate closing with a suitcase full of cash, the reality is that most people don't have this kind of privilege.
We frequently use credit to purchase our day-to-day necessities, but more importantly, good credit allows you to:
Qualify for mortgages and vehicle loans
Access loans with lower interest rates and more favorable terms
Having a good reputation in the eyes of employers and landlords
Better insurance rates
Even though the concept of credit isn't exactly new, understanding it may be a difficult task. But people who know how to use credit wisely have been able to get lower interest rates on their big purchases like homes and cars.
You could also experience that with the help of T and T Credit Counseling & Consulting. Whether it's for building credit, buying a home, or preventing fraud, we provide our clients with the necessary tools and resources to help them transform their financial capabilities.