Introduction to Credit

By Caitlin in Credit
Introduction to Credit

There are many misconceptions when it comes to credit. Some people seem to believe that it works as well as money, and allows you to buy things when you are a little short on cash. While that may be true to a certain extent, credit is actually a tool that can be used to help you or to trap you depending on the decisions you make with it. Credit is really a loan, one that must be paid back with interest and not playing by the rules could end up costing you more than you gained from any of your objects.

What is Credit?

The word credit comes from the Latin root word “credo” which means “I believe.” When credit is extended to you, it is on the belief that you will pay it back. Really what you are doing is making a promise to pay the bank or institution later for the goods and services that you are purchasing today.

In the past, credit was extended by individual businesses such as grocers and local fabric makers. People would have a long standing relationship with these businesses and so they would be trusted to buy things on credit. If somebody didn’t pay their bill, they would have their credit line severed and they would have to settle the entire bill on the spot or face criminal charges.

This has evolved into a system where the individual stores don’t extend their own credit, instead they will except credit that is extended from the major credit cards like Visa, Mastercard, and American Express. This shift in the extension in credit has lead to a standardized measure of credit worthiness which is your credit score.

What is a Credit Score?

A credit score is a standardized measurement of your credit worthiness. It takes a number of facts about your past credit history, how much money you have coming in, how much you have borrowed, and your general stability to determine how likely you are to pay your bills in the future. You can look up your credit report online and find your credit score.

There are two major credit bureaus that report credit scores and these are Equifax and TransUnion. They generally range in score from the 300s to scores in the mid 800s. It varies depending on the reporting institution.

What Affects Your Credit Score?

Your credit score can be positively and negatively affected in many ways. The single biggest thing that can affect your credit score is having late or missed payments. This can result in huge hits to your score and will even show up on your credit report when it is run. Other things that can affect your score is having a high debt-to-income ratio. If you have more debt than you make, this will negatively affect your credit worthiness. Click here to see exactly how your credit score is calculated.

However, if you are smart and diligent when it comes to your credit behavior it can be a huge asset to you. Having credit extended that is in good standing and paid on time will show potential creditors that you are responsible and this will come in handy when you want to buy a house, get a high paying job, or upgrade your car.

Find out more about your credit worthiness and what you can do about it by clicking here.

And click here for information on improving your credit score.


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