Credit Basics – What it is, why it’s so important
As a college student, you have probably received offers for credit cards. If you have graduated, the number of credit card offers has probably continued, if not increased. Exactly what is credit and why is it important? In this section you will find out the answers to these questions:
What exactly is credit?
What are the benefits of credit?
What is the difference between a credit and a debit card?
What is good credit?
How is credit established?
How can good credit be maintained?
What exactly is Credit?
Credit could be described as simply the ability of an individual (or company) to borrow money (personal loans, business loans etc.), or obtain goods without having to pay the entire cost up front (such as an auto loan or mortgage for example) payment of the debt is deferred based on an agreement of the parties involved. Usually if you are issued credit, you will be required to repay the amount of money borrowed in a specific time frame, at an interest rate specified by your lender.
What are the benefits of Credit?
There are some benefits to using credit that you don’t get by paying cash or writing a check:
- Convenience. Using a credit card to make a purchase means that you have to carry less cash when shopping. You don’t have to present additional identification that is sometimes necessary when writing a check. A credit card simplifies online purchases.
- Emergency Help. Have an unexpected situation? A credit card can be extremely valuable if you need money in an emergency situation and don’t have cash available.
- Budgeting. Making purchases and paying them off on a schedule can help you develop and maintain a budget.
- Security. If you lose cash, it can be used by anyone. If you lose a credit card and report the loss to the card’s issuer before it is used, the issuer cannot hold you responsible for any unauthorized charges. If a thief uses your card before you report it missing, the most you will owe is $50.
- Travel. A credit card is almost essential when traveling, whether renting a car, purchasing an airline ticket or booking a hotel room. And if you need cash, you can get it at ATMs or banks that accept your credit card.
What is Good Credit?
Good credit means you pay your bills on time, have a good credit history, have a low balance (or no balance) on your credit cards and that you do not appear to be financially overextended (borrowing more than you can afford).
How is Credit Established?
Normally when someone with little or no credit history is applying for a loan, a co-signer is often needed. This is basically a person with a good credit history who will contractually “vouch” for the person applying for the loan, and will enter to a legally binding contract agreeing to pay for the loan if the main applicant can no longer pay for it. Many times the co-signer will be a parent or another family member or close friend with an established credit history.
As long as other areas of your credit are managed wisely in the mean time, once the credit is obtained, good credit will be established if the payments are made on time on a regular basis, for an extended period of time, or until the loan is paid in full. If starting out with an auto loan, making the payments on the loan for at least 2 years will get you well on your way to establishing a good credit history.
However, credit card companies are usually more lenient about granting credit to individuals with little or no credit history. A credit card is normally how credit is first established, and it’s a good starting point as long as you use it wisely.
All if this information (your open accounts, and loans, and your payment habits) will be included in your credit report.
How can a Credit Card help?
It takes time to establish a good credit history, it doesn’t happen overnight. But you can get started by applying for a credit card, and using it wisely, which can help you on your way to having an excellent credit rating. Follow these simple steps to get started:
- Apply for a credit card, in your own name.
- Follow the directions to activate the card when you receive it.
- Use the card, but be careful not to charge more than you can actually afford on a monthly basis.
- Pay your balance in full each month, from your checking account – online bill pay is now available from most credit card issuers.
How can Good Credit be Maintained?
Once you have credit, you begin to build a credit history. Your credit history is used by lenders and landlords to gauge your ability to repay. Sometimes employers look at it to make a judgment on your character. Your history may also be review when you apply for auto or homeowner’s insurance. So, a good or bad credit history can make a big difference in getting the loan you need, an apartment you like or the job you’re counting on, as well as rates you pay for insurance coverage.
Good credit can be maintained by doing the following:
- Paying at least the minimum payment due, if not the entire balance on time, every month.
- Not overextending yourself. The fewer accounts you have open–whether they are loans or credit cards–the better. Limit the number of store cards you have.
- Not transferring balances unless you’re definitely getting a better interest rate and not closing accounts arbitrarily.
- Notifying creditors when you move so that bills arrive on time and your payments are never late. Even if you don’t get your bill, you still owe the payment and you can still make your payment. If your due date is coming up and you haven’t received a statement, call the Customer Service number located on your credit card or previous statement. Customer Service can tell you your minimum payment due and where to send the check.
- Checking your credit report at least once a year to make sure it’s accurate. Serious errors can appear in a credit report at any given time, and can cause credit to be denied. The sooner you spot an error, the faster you’ll be able to correct it.