What Is Credit and How Does It Work?

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Credit may seem like a capricious thing, but it can be demystified and used to help you to improve or better your credit score. Credit is when you borrow money in your own name in order to make payments on an item of higher price or value than you can afford all at once.

The highest forms of borrowing are often vehicles and homes, though jewelry, electronics and other types of consumer items are available on credit, such as furnishings and home appliances can all be bought on credit. With the expansion of credit over the past few decades stores have started their own store credit cards that you can use to purchase items from their stores and web sites on credit.

The positive of credit is the ability to finance something you can not immediately afford and the option to build a solid credit rating, for yourself for future borrowing power for the larger items like a house, which as much as 98% of people require a loan for. This borrowing power can also be extremely useful in the time of emergency when funds are low due to job loss, medical problems, injury, catastrophe or a death of an income earner. Borrowing allows people to get through these tough times without sacrificing your quality of life.

The negative aspect of credit is that it has allowed people to live outside their means and every day millions of people find themselves further in debt. While, this funds credit card companies, it can bring great hardship to those experiencing high levels of debt.

Credit, when used wisely, can offer opportunities and help you find a greater level of borrowing in the future. But when used unwisely it can push you into a worse financial situation and negatively affect your future borrowing power.

When you turn eighteen it seems that every bank and financial institution in the country suddenly has access to your personal information and suddenly wants to offer you €free money€, this is a dangerous time and you should avoid a good majority of these offers. It is wise to open one account, but be cautious and only charge up during a month what you are able to pay off completely before the due date the following month.

Having one or two open revolving accounts that are constantly in good standing can offer a great way to build a good credit score. This can also be used when someone is bouncing back from a bankruptcy, but can also be a slippery slope if you have not developed good spending habits.

Your credit report offers a reporting mechanism through three major agencies (Equifax, Experian and TransUnion) that gathers account, financial and personal information about you from the creditors and the bills you have, to form a credit rating and a credit score that represents your ability to pay debt. It monitors your timeliness in paying your bills and how often you move or change jobs.

While, much of this information may not seem connected it is all used to gauge whether or not you are a person worthy of credit, a job or even renting an apartment to. So, it’s vitally important to set a good credit rating and practices in place from the start as credit impacts you your entire life.

For some, bad credit and financial practices can lead to a bankruptcy which allows the debtor to wipe their debt clean, except for a few different areas (like school loans, taxes due and others) and start over. While, this may seem like a dream to many, it sets you back and means you not only have a note on your credit report showing the bankruptcy and your inability to pay any of your bills, but now you have essentially no credit and have to start over as if you were eighteen again.

Regardless of how you choose to handle your credit and your potential borrowing power, it’s important to take the time to understand the credit rating and reporting process.

Credit ratings, scores and reports are essential to the quality of life and options available to individuals and can have a direct effect on your status or level of success throughout your life.

Take the time to understand these things and work to set your self up for better financial success.

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