The Importance of Credit and How it Impacts Your Personal Financial Status

Often people consider loans and credits as bad elements that can damage financial health, but in reality, it is just the opposite. Ask any financial expert, and they will tell you how good credits are because it empowers you financially. You can build a strong financial base with credits provided you know the right ways of doing it. Most people who despise credit are the ones who fail to manage debts and look upon it as something damaging. Like chain saws are highly efficient cutting tools which can also cause enormous damage if not used correctlycredits too can do a lot of financial good with obvious damages happening from poor credit management.


Credits help to improve your lifestyle to enjoy a better life as you can acquire high-value items like house and car by taking a loan and buy other high-value items by using credit cards.  Fulfilling big-ticket wishes instantly is only possible by availing credits and loans. And to get quick access to credit, you must work towards maintaining a good track record of your credits by making timely payments. This is the fundamental learning from any credit education.


To make credit cards work for you, it requires a proper understanding of how credit works and how to keep debts under control. You must also learn the differences between credit report and credit score and why these are so important for you. Besides, you must also understand what the credit scoring factors are and how you can maintain a good credit score that gives more access to credit. Let us begin by discussing the basics of credit.


Credit – what is it?

In plain words, borrowed money is credit regardless of the manner of borrowing by availing loans or using credit cards, which are the two main types of credits. Also, there are many other types of credits, like using credit lines against open accounts. Although the credits operate in different ways, in the end, it is all borrowed money.

Installment loans like home loans, car loans, and student loans are the most common types of credit in which the loaned money is meant for a specific use. Such loans are payable in monthly installments.

Credit cards are typical examples of revolving credit that entails preserving the credit line after paying it back.  You can avail credit as long as there is some balance in the credit limit. The credit limit can change from time to time, depending on the credit performance of the cardholder and his or her income and credit history. Dependable creditors enjoy a higher credit limit.


Easy money with credit cards

Credit cards provided quick access to money that you intend to use from the approved credit limit of the card. Credit cards are open lines of credit that allow you to access funds by paying some fees and charges depending on the types of transactions. From annual fees to transaction fees and from balance transfer fees, late payment fees, over-credit limit fees, and return item fees, various cards charge various fees.  

Paying credit card bills within the due date without carrying over balance does not attract any interest which is chargeable on balance carried forward to the next billing period. Interest rates on credit cards vary according to the type of transaction like cash advances, purchases, etc.


Credit reports and FICO score

Across the United States, Experian, Equifax, and TransUnion are the major consumer reporting agencies that compile your credit report and generate the credit score that numerically represents your credit history. By using the credit score lenders determine the creditworthiness or reliability of borrowers.

Credit reports form the basis of generating FICO credit score by using Fair Isaac’s formula, which computes the score on a scale of 300 to 850, representing the lowest and highest marks respectively. Higher credit score enables you to get lower interest on loans with easy approvals, and lower is the credit score higher is the interest, and the chances of acquiring the loan are low. However, consumer reporting agencies do not disclose the method of calculating the credit score. The credit scores can vary between the agencies because they may have different data sets of individuals.

Your credit report for the last seven years captures your payment history that includes timely and late payments as well as missed payments. It also reflects all present and past credits. The credit score takes into account the types of credits you experience, and it is better to have exposure to both installment loans and revolving credit by using credit cards.


Good credit and bad credit

Good credit indicates that the borrower is dependable because he or she makes timely payments for all credit accounts until full payment of the balance. It means that the person is dependable and takes responsibility for settling the credits in a disciplined manner.  Therefore, lenders would not hesitate to approve loans to the person with a good credit score and even charge lower interest than those with not so good credit score.

In addition to lenders, employers also use credit report and credit score to evaluate prospective employees. Landlords may also refer to your credit score to decide your eligibility as a tenant. Insurance companies might also refer to a credit score when processing many types of insurance, like car insurance and homeowner’s insurance. Sometimes, student loan eligibility also depends on credit score.

Bad credit score can make it difficult to secure new credits and even escalate interest rates.

Read this article to learn more about buying a condo with bad credit.


Tips for maintaining good credits

Timely payment of bills and maintaining a low balance on credit cards are the best ways of improving credit score. Credit inquiries dent your credit score, and it is best to avoid too many inquiries in a short time. Stay alert about identity theft by monitoring your credit report and credit score at least once a year by obtaining your free credit report to identify any mistakes and arrange for its correction.

Keeping your financial records in order and maintaining a close watch on your financial transactions should help to avoid falling victim to scams and fraud.

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  • Hi there…

    I believe that anyone can create a flexible, natural lifestyle without a ton of stress!


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