If you have bad credit, it can feel like an isolating experience. But, the truth is that you’re not alone.
In fact, around 30% of Americans have a credit score lower than 601. While this might seem like an arbitrary number, it affects your life more than you may realize.
But, why is credit important and how do you improve your credit score over time?
This practical guide to credit is here to answer all of your questions. Keep reading to take the first step towards better credit.
What Is Credit?
Before we begin to answer questions like, “Why is good credit important?” it’s important to have a solid understanding of what credit actually is.
In the simplest terms, credit is the ability to borrow money with the understanding that you’ll pay back the borrowed amount later.
Of course, if you don’t have a good track record of paying back what you’ve borrowed, creditors will no longer have confidence in you, resulting in bad credit.
There are three primary types of credit. Here’s a quick overview of each one.
Anytime you have an account that you pay toward each month, this is classified as an open account credit. These are accounts that don’t typically charge interest, like your monthly utility bill.
Unless you miss payments or have a record of paying late, open accounts won’t appear on your credit report.
Revolving Credit Accounts
From the age of 18, most Americans sign up for at least one credit card, either to use in the case of an emergency or as a way to buy things in between paychecks.
When using a credit card, you’re only required to pay the minimum amount each month. The remaining balance then rolls over to the next month, sometimes resulting in interest. This classifies it as a revolving credit account.
Even the most debt-conscious among us usually have some kind of installment account. This is when you pay a fixed amount each month to go toward a loan.
The most common examples of this are auto loans or house mortgages.
What Is a Credit Report?
Your history with all three types of credit is tracked as part of your credit history, which is compiled in a credit report.
In the United States, there are three independent credit bureaus that compile your credit history into a report. They are Equifax, Experian, and TransUnion.
Your credit report is extensive and contains the following information:
- Number of loans you’ve taken out and how much you’ve paid back
- Number of credit cards you have and any outstanding balances
- An overview of monthly payments and your track record of paying (or not paying)
- Any financial setbacks you’ve experienced, like a foreclosure or bankruptcy
All of these factors are weighed to help determine your credit score. This is a three-digit number that creditors can quickly use to determine whether or not they have confidence in lending to you.
In their eyes, the lower your credit score, the less likely you are to pay back what you owe.
Credit Score Ranges
Credit scores can range between 300 and 850. The more you show that you are reliable, the higher your score goes. Your score fluctuates, based on actions you take throughout your life, like buying a house.
Scores are classified as the following:
- Poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Excellent: 800-850
You can check your credit report to see your credit score for free, once every 12 months, as dictated by the Fair Credit Reporting Act.
Why Is Credit Important?
Now that you know more about credit, you can see that many of your future goals are dictated by having good credit. If you have a low credit score, it will be harder for you to buy a car or house. It also makes it harder to get a loan in case of an emergency.
And, if you have dreams of building your own business from the ground up, having a bad credit score will make it nearly impossible to get a loan.
There are other benefits of good credit as well. If you’ve shown that you’re financially responsible, you’ll qualify for lower interest rates, which ultimately saves you money. This gives you the freedom to save more for retirement or for your children’s futures.
How to Build Good Credit
The good news is that bad credit doesn’t have to be permanent. You can use online tools to help you learn good credit habits. And, you can take action to help improve your credit score little by little.
Remember, your credit score didn’t become bad overnight, and it won’t become great overnight either. But, by doing the following tips, you can put yourself on the path to better credit.
It may sound counterintuitive, but having no credit can be almost as bad as having poor credit. This is because there’s nothing to show lenders that you can be trusted.
If you don’t have any credit, you’ll want to open a credit account but remember to use it wisely.
Make Payments on Time
Once you have some type of credit account, make your payments on time, every time. This will show lenders that they can have confidence in you.
Only Apply When Needed
It looks suspicious if you apply for multiple credit accounts all within a short period. Try to limit the amount of debt you take on at one time.
And remember, just because you get offered a great credit card deal or something of the like, that doesn’t mean you have to take it.
Make Good Credit Habits a Priority
The best way to build good credit is to make good credit habits a priority in your life. A good credit history spanning several years shows lenders that you are trustworthy.
This means you’re more likely to get loans when needed to help you achieve your goals in life.
The Path to Better Credit Starts Today
Now, you know the answer to the question, “Why is credit important?” But, it can still feel overwhelming to take the first step to improve your credit.
You don’t have to go it alone. Here at The Credit Agents, we’re here to help you achieve your goals. Take a look at our services to see how we can help.