What is Credit?
Credit is "extended" to you when someone lends you money or assets, and trusts you to pay over a designated period of time.
There are two types of credit:
Unsecured: There is no asset or collateral being used to secure the debt. An example of unsecured credit is a credit card.
Secured: Some type of collateral is used to secure the debt. This can be a house, car or boat that the lender can take back if the loan isn't paid.
Benefits of Credit
Easier to buy a house
Easier to finance a car
In some cases, necessary to get car insurance
Safer than carrying cash
Easier to rent an apartment
Ability to rent a car
Allows you to make purchases over the Internet
Some jobs may have a credit-check requirement
Can use it to pay college expenses
Necessary to build a credit history
Risks of Credit
Easier to make impulse purchases
You can accumulate more debt than you can afford
Misunderstanding of complicated terms and conditions
How Do I Get Credit?
Credit History: None, Bad, Good
What type of credit experiences can someone with no credit history expect to have? Lending institutions such as banks and credit unions rarely lend money to people with no credit, because they have no history to indicate how likely they will be to pay back the loan.
What type of credit experiences can someone with a bad credit history expect to have? Future borrowing is difficult and, in some cases, impossible, because there is no basis for a lending institution to trust that the money will be repaid.
What type of credit experiences can someone with a good credit history expect to have? They can be granted credit more easily and with less-stringent conditions.
Credit Score Ranges
A credit score determines your credit grade and is based on the data found in your credit report. The credit score broadly refers to a number generated by a credit-scoring model to determine a person's creditworthiness.
Commonly, there are six ranges:
There is no single cutoff score used by all lenders-and there are additional factors that lenders conider-but the higher the score, the higher your creditworthiness and the lower the risk.
The best way to avoid getting into trouble with credit involves advance planning for how it is used and how it is paid.
Ways to Avoid Bad Credit
Limit the number of creditors. Many creditors interpret too many open credit accounts as a risk.
Spend only what you can afford at the time.
Think before you buy. Remember, credit is like a loan. Ask yourself, "Would I really go to the bank for a loan for this?"
Stay below the limit. Each lender is different, but for some lenders, you need to be 50% or below your limit to get the best rates.
Ensure that payments arrive before the due date. Check out payment options such as online, telephone, and automatic payment to avoid late fees.
Pay the full balance due each month or at least pay more than the minimum. This will cut down on interest payments.
Don't lend out your credit. By adding others' names to your credit cards or adding yourself as a co-applicant to someone else's loan, you are allowing others the opportunity to weaken your credit rating. Remember that you are liable for all expenses taken out under your name.