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You’ve probably been around the block long enough to know that your credit report and scores are important. But what is credit and why exactly does it matter? In this post, we demystify what it is and why it’s important.
What is credit?
It is essentially a promise to pay for something later that you buy now. People use it to pay for cars, homes, etc.
Having good credit means that you’re good at keeping your promises to creditors. You make on-time payments and you use it responsibly. Good credit means you’re less of a risk so creditors reward you with the best interest rates, terms, and fees on different products like loans and credit cards.
Bad credit means that you’re not so great at keeping your promise to make payments. Maybe your payments are late or you miss payments altogether. The good news is, you can rebuild it by changing these behaviors.
Why is credit important?
Credit is necessary to get loans, credit cards, and other debt products to buy homes, cars, and other big items. You may even need it for a loan to start a business. There are many reasons that people may decide to use credit.
With this said, it should be used sparingly. Consumer debt is sitting at $3.9 trillion dollars as of January 2019. Using credit can be necessary to reach certain goals like homeownership. But it can also become a problem when your consumer debt gets out of control.
You have to pay back all of the money you borrow. Don’t max out your cards! Debt payments can get in the way of your other financial goals like saving for retirement or investing.
How can you build credit?
The first step is grabbing your reports to see what’s on them. Your credit reports are a history of how you’ve managed accounts in the past.
Creditors look at these reports to get an idea of how good you are at keeping your promise to pay off debt. You can grab your reports for free at Credit Sesame! (Don’t you love free?!)
Next, check out these other posts:
- What are the components that make up your credit score?
- 25 Things to Do to Improve Your Credit Score
- How to Build Credit from Scratch
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