What Is Credit?
Credit. This one simple concept can set you up for a lifetime of success or become a gateway to a bottomless pit of fees and hardships. It’s a two-sided coin. But there is no reason to fear credit if you understand what it is, and how to use it to your advantage.
What is this whole credit thing really all about?
“Credit is a deferred payment arrangement between a borrower and a lender that facilitates access to funds for repayment at a later date.”
What Credit is not?
Credit is not cash. Repeat it like a mantra. Ultimately, credit is like a small personal loan. It is supplementary funds lent to you by an institution that you are agreeing to repay. Not only is it your loan but it is also a measure of your ability to repay a creditor.
Why Do you Need Credit?
Good credit is necessary if you plan on making any major purchases down the line, like owning a home or renting a property and purchasing a car. Some employers or landlords may use this information as part of the selection process. Your credit helps determine financial risk, projecting the likelihood of you being able to repay a loan, handle a credit limit increase or stay on top of a monthly service plan (phone bill…). Other important factors may include your income, your existing assets, and debt, how long you’ve worked for your current employer, balances in your savings account; just to name a few.
The primary source of information to determine your financial risk to a creditor is your credit score.