Credit is a
privilege and a convenience that allows you to make a purchase without cash. You
get credit by promising to pay in the future for something you receive in the
present. But, there are strings attached. Credit usually costs something (interest),
and what is borrowed must be paid back.
Credit cards are the most common
form of credit. Other types include home mortgages, auto, student and personal loans, trade financing, etc.
Importance of good credit
Establishing a
good credit history is an important part of your financial future. It can open
doors -or- it can shut them down. Good credit makes it easier to get loans, credit
cards, and better interest rates when you borrow. Bad credit, on the other hand,
makes it harder to get a loan or lower interest rates.
Besides affecting
loans and interest rates, a variety of people and businesses make decisions affecting
your future based on your credit history. Landlords sometimes use credit reports
to decide among rental applicants. And a potential employer may even assess an
applicant's credit report prior to extending a job offer. Your credit report may
also be reviewed when you apply for auto insurance or homeowner's insurance, or
even a mobile phone.
* See Establishing
Credit to learn more about how
to establish your credit.
Understanding credit reports
When
you apply for credit, the lender reviews your credit report before approving your
application. Think of a credit report as a resume. It details how well you have
paid your bills and used financial tools such as credit cards and checks.
Just
like a report card or a resume, a credit report is used to document your performance;
in this case, your financial performance. The
report details how well you pay your bills, bank loans and credit card purchases.
It also can indicate if you have abused financial tools such as checking accounts
and debit cards. Even debts of small amounts, if not paid on time, can hurt your
credit standing.
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