Today, the word credit has become a word that is immediately associated with debt. However, when used responsibly, getting credit from a financial institution can you build a good credit history.
At one point in our lives, we need access to large sums of money. We may need this money for paying for education, starting a business, buying a car or settling a debt. Whatever the reason may be, taking credit from a financial institution is what will enable you to achieve this. All you need to do is plan and prepare how you are going to get and repay that credit back.
We need to understand that getting credit from a financial institution is a good decision provided you plan and prepare how you are going to get that credit and repay that credit back.
The term ‘credit’ refers to an agreement in which a borrower receives an item (good or service) now and agrees to repay the lender at a later date, often with interest.
There are two kinds of credit:
1. Good Credit
Credit, is very important because it affects almost every major purchasing decision. Having a good credit reputation can help you get a good rate on a credit card, car loan or home mortgage. To gain good credit ratings, you borrow money and pay it back on time and for the full amount.
For instance, having supermarket credit card which you use only for your budgeted home supplies because you do not like to carry a lot of cash around. So, each time you go to the supermarket, you use your card to pay for goods bought.
In so doing, you are promising to pay the credit card company back when you get its statement. When the statement arrives, you pay off the amount you owe on time. The supermarket that issued you the card will then report to the credit bureau that you have paid on time and for the right amount. The more good reports that go to the credit bureau, the better your credit score.
Having a good credit report is beneficial because it enables you to borrow more money at better interest rates. This is because the banks are made aware that based on your credit history you are a responsible person.
2. Bad Credit
Bad credit is the exact opposite of good credit and is often reflected on an individual’s credit history. Credit grantors must always review your credit applications and credit reports to determine the financial risk:
- If they lend you money, how capable shall you be to pay it back
- Extend you credit
- Give you goods and services
As a financial institution, they would not want to risk loaning money or extending credit to those individuals whose creditworthiness is questionable or those who have a track record of poor money management. You get a bad credit report if you have a bad credit history. Your bad credit history is determined by the following factors:
- The amount owed previously
- The timeliness and consistency of your payments
- Your nature and lifestyle
Having bad credit makes it more difficult or costly to obtain loans from financial institutions. If you have large amounts owed to financial institutions or entirely stop repaying the credit, you develop bad ratings with the credit reference bureau and a bad credit reputation.
However, if you do have a bad credit rating, it can be improved and fixed overtime as long as you pay back your debts and develop responsible financial disciplines when it comes to getting credit.
Provided you understand how to use the credit, by using it in a way to build and develop a good credit rating, getting credit can actually not be a great help. Read more on this in the links below.
Learn more:
