Do you want to help your children develop smart spending habits that will last a lifetime? Or are you a young professional, or know one, who may be using credit for the first time?
Establishing and building good credit is often essential to achieving financial success in life, but a solid credit rating can be difficult to attain. With credit, there are a lot of potential pitfalls, especially for those new to the concept. It is important to understand what credit is, how it works and how to use it wisely.
What is credit?
Credit is the ability to take on debt. Some common examples of credit include student loans, car loans, credit cards and home mortgages.
How credit works
Credit allows you to borrow money from a lender to access goods or services now, with the understanding that you’ll pay for those items later. However, in addition to paying back the amount you borrowed, you’ll also pay interest charges and perhaps additional service fees, which can make managing credit more complicated.
Your credit history, credit report and credit score
A credit report is essentially a summary of your credit history and includes information about the number of credit accounts you have, your borrowing limits and outstanding balances. It will also include a record of any late or missed payments.
How to build credit
Building credit doesn’t happen overnight—it takes time and diligence, which is why it is important to develop good spending habits and begin building credit early.
If you have a history of making payments on time and managing credit effectively, you’ll be more likely to receive a credit card or loan with favorable rates and terms. Conversely, if you’ve never used credit or have a history of missed payments, it will be more difficult to get approved for a loan or credit card, and if you do, you may get less favorable rates.
Why is credit important?
Credit scores are typically used by banks and other businesses to determine if you’re someone who’s responsible with money or if you are a high credit risk. Good credit is essential if you want to borrow money to fund a major purchase such as a car or a home, and can help you qualify for credit cards that can let you buy things that are only possible with credit and pay for unexpected emergencies.
Credit reports and credit scores are used by more than just credit card companies and banks. Many employers will check your credit report before they decide to hire you. Landlords may also use credit as a factor when deciding whether to rent you an apartment or when determining the size of your security deposit.