I talk a lot about credit but do you really know what credit is?

Credit is usually referred to as the capacity to borrow money.  It’s also the ability to obtain goods and/or services now and to pay for them at a later date.  When borrowing money under any circumstance, interest is usually added to the cost. 

Simply put, when a lender gives you credit, they trust that you will pay them back either when the bill is presented or over a period of time.  Because they trust you to pay it back, they temporarily allow you to borrow money from them. Think about using credit cards, loans such as mortgages or auto, or lines of credit such as HELOCs.  Lines of credit usually offer lower interest rates.

Lenders determine your credit worthiness by looking at your credit history and/or credit scores.  Credit scores are based on how well you’ve managed your borrowed monies in the past with other lenders.  Credit scores also determine how well lenders trust you.  The higher the score, the better you manage your borrowed funds.  Scores range from 300 to 850 with the higher number indicating a more trustworthy borrower.

Why do you need good credit?  Because if you need a loan, good credit will allow you to get one.  Better credit will allow you to get lower interest rates, rent apartments, and get lower insurance rates.  And, did you know some employers check your credit when you’re applying for a job?

Your credit scores are based on several factors.  Do you pay on time?  How much do you totally owe?  Have you had a longer or shorter credit history?  What kinds of credit do you have such as revolving, installment and/or open?  Have you been applying for a lot of credit lately?  Do you have new accounts?

Moral of the story:

Credit is usually your ability to borrow money from a lender.  It is a basis for how trustworthy you are when it comes to paying back borrowed funds.  The higher your score, the better you are at paying back your lenders.  Do you need 850?  Absolutely not!  But you don’t want 350 either.  If your scores are low, you need to make improvements to raise them.  Time to start.  Please review my blog on Credit Scores for help.