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What is Credit?

Updated: May 3, 2023

Having good credit is important because it affects the interest rate you get on loans and mortgages. It also helps with renting an apartment or getting a cellphone contract. Having bad credit can even affect whether you are able to get a job! Having good credit means that you have demonstrated responsibility with money by paying your bills on time and not maxing out your credit cards.


A graph about credit score

Credit is the right to borrow money. You can use credit to buy things like houses, cars, clothes and food. Credit cards are a type of loan that you pay back with interest over time. This means that if you have a $10,000 debt on your credit card at 20% interest per year (which is typical), then it will take about five years for you to pay off this debt if all payments were made on time every month during those five years.


If we were going back in time and looking at how people used credit before there were banks or even paper money--say around 500 BC--it's likely that people would trade goods with each other as payment instead of using coins or bills today because there wasn't much else available at that point in history!

A credit card and laptop

You can take out a loan, use a credit card and even rent an apartment.

  • A loan is a way to borrow money from someone else. When you pay back your debt, you're repaying the person who gave you the loan.

  • A credit card is another way to borrow money--but unlike a bank loan, which must be paid off in full at the end of each month with interest rates that vary depending on how much money was borrowed and how well you've been paying back previous debts (your "credit score"), credit cards allow users to pay off only what they charge each month without having to worry about interest rates or other fees associated with borrowing money from banks or other lenders like payday lenders (though there are still fees associated with using these cards). This means those who have poor credit scores may struggle more than those who have higher ones when it comes time for them both types

You can also get a loan to start your own business or buy equipment.

If you want to borrow money, but don't have much in the way of collateral (or anything else), then your credit score is what will determine whether or not you'll be able to get it. The higher your score, the better chance there is that someone will lend money to you at a reasonable interest rate.


The more money they lend out at once and the less secure their investments are (like when they're investing in new businesses), then the higher their risk tolerance is going to be--and thusly: The more likely it is for them not just one person but many people who have borrowed from them before will default on their loans!


People who are having a meeting

Banks and other lenders look at how good your credit history is before they lend you money. Your credit score is a three-digit number that tells lenders how good your credit history is. The higher the score, the better. The lower the score, the worse. Your credit score is based on how well you've paid your bills in the past and whether or not you've maxed out any cards or loans (which can hurt your ability to get more money).


If you pay all your bills on time and don't use too much of what's allowed on each card, then it's likely that your lender will see this as an indication that they can trust you with more loans in the future--and thus offer them at reasonable rates with lower interest rates!


Your credit history is a record of your financial activity. It contains information about whether you pay your bills on time and how much debt you have in total. The three major credit bureaus collect and store this data, which they then sell to lenders who use it to determine whether or not they should lend money to consumers like yourself. Your credit history also helps potential employers decide whether or not they want to hire someone based on their past performance as a borrower (or employee).


Your score also takes into account how long you've had credit accounts, including mortgages, car loans and student loans. The longer the better: it shows that you're responsible with money and can be trusted to repay debts in a timely manner. The number of accounts is also important -- being able to open several lines of credit at once can help spread out payments and make them easier on your budget.


The amount of debt you have compared with the amount of money available in each account will also affect your score -- if one account has $10k available but owes $15k total, for example (a ratio of 0.66), then this would be considered worse than having two separate accounts where one has $5k available with an outstanding balance of $7k (ratio 1), because it means that more debt exists per dollar available for repayment as well as overall riskiness from a lender's perspective due to higher potential losses from nonpayment or defaulting on multiple loans simultaneously.


A high credit score means that you are responsible with money, which may lead a lender to trust you when offering an unsecured loan or mortgage at a lower interest rate than someone with a lower fee score. A bad payment history can hurt your rating and make it harder to get approved for loans or credit cards in the future.


Your credit score shows lenders whether you are responsible with money. It is a number between 300 and 850 that's based on your credit history, which includes how much debt you have, the types of accounts you have open and how long it's been since those accounts have been used.


Your score can range from excellent (800+) to poor (620-). A high credit score means that lenders perceive you as being responsible with money; a low one means they don't think so highly of your financial habits. Credit card companies use these scores when deciding whether to give someone a loan or not--and they use them because they want their customers' money!


Conclusion

If you have good credit, you'll be able to get loans at lower interest rates. This can help you save money on things like buying a home or starting your own business. If you have bad credit, it may be harder for lenders to trust that they will get their money back from you if they lend it out in the first place.



Disclosure: For Change Financial only recommends products we would use ourselves. All opinions expressed here are our own. This page may contain affiliate links and we may earn a small commission, at no extra cost to you. Read our full privacy policy on our website.

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