A lot of people worry about their credit and many financial experts devote much of their time to encouraging people to think about it. So what is it about this thing called credit that’s so important?
Think of credit as a very powerful financial tool. Like power tools, when used correctly and wisely, credit can make your life a lot easier and help you accomplish than you could without it. But used incorrectly or foolishly, credit – like power tools – can create a mess and lasting damage.
What’s the value of good credit? It allows you to make purchases of items you need without having all of the cash. For example, most of us don’t have enough money on hand to buy a new vehicle, and the vast majority of us could never afford a house without the help of a mortgage loan. Responsible use of credit gives us a great deal of convenience, too – allowing us to shop or travel anywhere without carrying cash.
Creditors pay attention to how you use credit. That’s what your credit rating and credit score are all about. They provide a history of how you’ve handled credit in the past, so creditors can determine whether or not they believe that you’ll pay them back.
Independent credit reporting agencies like Equifax and Experian collect and organize information from creditors about the people who borrow from them. Credit reports include detailed records from each of your creditors about how much you’ve borrowed and whether you’ve paid it back on time. Credit scores condense all that information into a three-digit number that gives creditors a quick measure of your credit habits.
Every time you borrow money, use a credit card, or make a payment, you’re having an effect on your credit rating. If you’re borrowing wisely and making all your payments on time, other creditors will probably be eager to extend credit when you need it. But if you’re skipping payments, making them late, or borrowing more than you should for things you don’t really need, you’re going to hurt your ability to get credit in the future.
Remember: credit is like a power tool. Used wisely and carefully, it will help you do a lot. But when it’s used incorrectly, it becomes dangerous and destructive.