Understand The Financial Power Of Credit

Written by: MoneyPrime Staff

Understand The Financial Power Of Credit
Credit can seem like a daunting concept to understand and master. After all, there are many factors that may seriously influence and impact our credit score and creditworthiness. Credit cards may be frowned upon as a gateway to debt and financial meltdown – but when used wisely, credit can be a helpful tool you’ll be happy to have on your side.

Let’s face it, most of us lack substantial financial literacy and most likely didn’t receive adequate education about how money and credit work from home or school. Sure, we know that we are to go to school and get a job after graduation, but knowing what smart money moves to make, and which ones to avoid is critical. A person’s credit rating and financial standing are keys to securing loans for business, owning property, and other desirable perks.

What Is Credit?

Credit is intangible money that is borrowed to be used for purchasing goods and services. A line of credit is extended to a person via a credit grantor. Before a person can receive a specific credit limit, they agree to a contract that details repayment, fees, and other points.

There are four types of credit that a person may encounter.

  • Revolving credit
  • Installment credit
  • Service credit
  • Charge cards

It is important to establish a good credit score if you want to make a significant purchase, like a new car or home. You may be familiar with revolving credit, which is often in the form of credit cards.

With revolving credit, every month you can spend up to the designated credit limit. Each month there will be a balance and an expected date for due payment. Typically, the person receiving credit can pay off their debt in full, or they may make a minimum payment. If there is a lingering balance, charges or fees in addition to the original debt owed may accrue.

Installment credit is visible in the form of loans for students attending college, paying for cars, or a property mortgage. A borrower takes on a specific amount of money from a lender and is expected to pay recurring payments in installments, plus any interest, until the debt is cleared.

Service credit is usually tied to utility bills or a membership, where there is an agreement to pay a monthly fee for services rendered. One neat thing about service credit is that sometimes they can help boost your credit score positively, provided you pay your bills on time. Cellphone plans and utility bill payments may be reported to credit reporting agencies.

Charge cards are not as forgiving as a credit card. Unlike credit cards that may allow a borrower to still use their card with a remaining balance, the balance on a charge card must be paid in full every month when due.

Why Your Credit Score Matters

Handing out credit to people involves some significant financial risk. A lender wants to make sure that the borrower they get into an agreement with is going to repay any debt owed in a timely fashion. A person’s credit score is a measure of their financial security, and how much of a risk it is to extend credit.

Factors that are part of evaluating a person’s creditworthiness include the following points.

  • Length of employment
  • Current bank account balance
  • Length of stay at current residency
  • Income and any assets

A good credit score is important in life, considering that both employers and landlords may reconsider taking on a client or tenant based on their creditworthiness.

What About My FICO Score?

There are three major national credit bureaus in the United States that you should know. Experian, Equifax, and TransUnion are the main companies that collect a consumer’s personal information and credit history. It is normal to see a slightly different credit score reported for a consumer, depending on which bureau you choose to review your credit information.

It is important to remember, every credit score you see from a resource may not be a FICO score. When checking your credit score, you want to know your FICO score. All credit reporting agencies may not have up-to-date information on a consumer, and inaccuracies do happen.

The FICO score is created by the Fair Isaac Corporation. A consumer’s FICO score and creditworthiness are determined according to one’s current debt, types of credit used, if there are any new accounts, payment history, and the length of credit history.

When evaluating a FICO score, the range falls between 300 and 850. Scores that are 650 and above are move favorable than score under the 620 mark. A good payment history carries the most weight when calculating a consumer’s creditworthiness.

Ways To Build Your Credit Score

Everyone doesn’t have perfect credit, so what to do when one’s credit score is less than stellar? Thankfully, there are ways to repair and rebuild one’s credit score so that it is easier to obtain credit from lenders.

First, seek to pay down any and all debts that you owe. It is impressive when you have a high income and low debt ratio.

If you have any open credit card accounts, bank accounts, or other weighty assets, do not close them. A good credit score looks at how long you have kept an account open to build your credit history.

Any outstanding debts with creditors should be handled with a payment plan. Make an earnest effort to repay your debt with a working plan. Additionally, try to pay your bills on time for any future debts owed.

Consider signing up for a secured credit card to help boost your credit score. The way this card works, you’ll be expected to put some money upfront to create a line of credit. Over time, if you can show that you can use your secured credit card responsibly, you’ll see your score go up over time too.

Be patient with yourself, as it may take 60 to 90 days for your credit score to move in a positive direction. In the worst-case scenarios, it may be helpful to seek out a counseling agency to repair your credit, and get your financial health back on track.

Good Practices To Maintain Financial Health

Make sure to check your credit at least once a year. You can take advantage of a free credit report by checking with your bank, or a credit reporting service. Make sure to do a comparison between the three credit reporting bureaus, as discrepancies can and do arise. If you discover that your credit report seems off, or there is fraudulent activity, immediately contact each major credit bureau.

Keep a close watch on your credit score, and practice good habits. Keep your overhead low, increase your savings, reduce spending, and keep a good income-to-debt ratio. Pay your bills on time, open and maintain good credit accounts, and over time you will see positive results.

Credit doesn’t have to be some scary part of being an adult. Take the time to familiarize yourself with how credit works, and how to make your money work for you.


Related Posts

Understand The Financial Power Of Credit

Share Tweet