The world in which we live in prefers to operate on a cash basis. If you want to purchase something, like groceries or another type of goods, it will cost a set amount of money. So, in order to bring home your milk, eggs, and cheese, you need to pay cash to the store for their exact cost.
Now, not everyone has cash available to purchase larger items, so they could use a check, debit card or credit card. The basic difference between these three options is that the check and debit card are connected to a checking account where you can only spend what you have in the account. The credit card—and other types of credit such as mortgages, auto loans and personal loans—offers the consumer the opportunity to purchase an item with the promise to pay that money back in the future, generally with interest to be paid over a set period of time. This concept of credit gives consumers the chance to buy larger items (i.e. houses, cars, appliances, furniture, etc…) without needing to have the cash available for the entire purchase amount upfront.
Below, you’ll find more discussions about types of credit, along with resources to learn more about your credit history and how to manage it.
What is Credit?
Basically, credit is the privilege of buying now and paying at a future date. The entity that extends credit is called the lender or creditor, and the entity receiving the credit is usually called the borrower.
Credit is used for a number of things from buying gas on your credit card to purchasing a house through a mortgage. All credit transactions involve paying back the amount borrowed plus interest over a set period of time. Many credit cards offer borrowers the opportunity to pay the complete amount within a month to avoid paying interest, while automobile loans and mortgage financing can be paid back over a number of years.
- Credit Defined – Definition of credit, provided by Experian, one of the leading credit reporting agencies.
- What is Credit? – Basic definition of the concept of credit in the finance world.
- Annual Credit Report – Official website where consumers can go to get a credit report from each of the three major credit reporting agencies.
- Credit Score Basics — 5 high-level FAQs about what credit scores are and how to understand your reports.
- Credit Scoring — Helpful page giving an overview of credit scoring and how it functions.
- Credit Score Calculations — Information on what factors and weight go into credit score calculations.
In general terms, good credit is based on the past credit experiences of a borrower. If a borrower exhibits the ability to pay back their loans on a timely basis, without being late on the payments, they would be considered as having good credit.
By having good credit, consumers are able to borrow money whenever they need it, and often at more favorable interest rates than others without good credit. Having and keeping good credit can end up saving borrowers hundreds or thousands of dollars each year.
- Improve Your Credit Score – Information on what consumers can do to raise their credit scores.
- Credit Score Guide – Downloadable publication which discusses credit scores and how to get a good score.
- Good Credit Benefits —The benefits and rewards of having good credit are outlined in this article.
Lenders look at the past debt management history of potential borrowers, and they base their lending decisions on the way those consumers have paid their past obligations. If borrowers are constantly late or become months late on making payment it will have an effect on their ability to borrow money, they may be hindered by their bad credit. If the past credit experiences of a consumer are bad, he or she may not be able to get a loan or may pay a much greater interest rate for a loan.
Generally speaking, many lenders will base interest rates on the credit score of the borrower. Although there are bad credit loans available, borrowers with good credit often receive better terms. A consumer credit score is typically a three digit number which indicates the past borrowing and payment history. A higher credit score will indicate a better credit risk and usually earn a better interest rate.
- What is a Bad Credit Score? – Web site providing information on credit scores and what makes a score bad.
- Credit Score Information – Article discussing credit scores and showing how a poor credit score will cost borrowers more money.
- Repair Your Credit – Informative page giving tips on how to repair your credit and improve your credit score.
- Beware Credit Repair Scams – Tips on how to spot credit repair scammers that prey on consumers looking to improve their credit.
- Credit Rating Fixes – Listing of nine helpful suggestions that can help fix a credit rating quickly.
In order to get credit, you need to have established your creditworthiness. This creates a problem for young adults looking for their first loans. So, in order to be creditworthy, you need to establish credit and pay it back on a timely basis. The easiest way to start would be to get a basic credit card and make regular payments. Once you have done this for six months to a year, the credit companies can see that you have established past credit favorably, and could be worthy of future loans.
- How to Establish a Credit History – Ideas on how a consumer with no credit can establish a credit history.
- Establishing and Using Credit – Informative page from the Federal Reserve Bank on how to establish and use credit wisely.
- Establishing Credit History in the U.S. – Tips on how to establish a credit history within six months.
- Safely Build Credit History – Article with suggestions on how to build your credit history safely.
We hope this helps answer some of the questions you may have about credit. A credit rating or score is one of the most important financial possessions you will ever have. As such, it is important to value your credit history and take care of it. If you have good credit, make sure you keep it. If you have bad credit, work to improve it. Remember, your bad credit could be costing you money with potentially higher interest rates and lost opportunities!
DISCLAIMER: Although NetCredit is an internet lender of personal loan programs, it does not provide financial advice, nor does it vouch for any vendor or service mentioned on our personal finance news blog or the NetCredit consumer lending glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.