One of the concepts one must grasp in adulthood is credit and how to utilize it well. In the financial world, credit is one aspect that helps determine how responsible a person is in handling their money. It also allows you to explore financial opportunities to help you thrive and grow.
Here’s a summary of what credit is, what it can do for you, and how to build it.
What Is Credit?
Credit refers to one’s ability to obtain goods, assets, and services. In other words, it allows you to borrow money or obtain assets in advance, and you can pay them later, in a specified time, and usually with interest. It is essentially a privilege laden with responsibility.
Credit is present in exchanges between a borrower and a lender. For example, you want to borrow money from a lender to fund something, and the lender gives you the money. You both agree on how you pay the money back, when to do so, and how much the interest rates would be. You then agree, and when the designated time comes, you pay the money back, whether in whole or in installments.
Credit comes in many forms, types, conditions, and materials that can help you when you need it.
Debt and Forms of Credit
There are many reasons why so many people would want to purchase or obtain something on credit. The most general explanation would be that they do not have enough money for something or cannot purchase it in one go.
For this reason, we have several types or means of credit, such as credit cards, loans, debt consolidation, and more, to accommodate individuals with different needs and financial situations.
Taking out a loan is one of the best examples of buying or financing something through credit. Loans are programs that lend you a certain amount of money for specific purposes, and you have to pay back the money to the lender in small amounts for a specific time with interest. A few popular loans are personal loans, a loan where you can borrow money for nearly anything, and auto loans, which focus on purchasing vehicles.
In 2019, around 73.2% of Canadians were in debt. The most typical form of debt they are in is the mortgage, and 40% of Canadians have it. A mortgage is a loan that lends you money to buy non-movable properties like houses and is secured, meaning the lender can take away the property if you cannot repay the loan.
Credit services like loans allow you to obtain something at manageable prices or provide an opportunity to help you fund something when you’re out of money or in unexpected emergencies.
But remember that before you avail of any of these credit services, it’s essential that you can pay back what you borrowed. So if you want a loan or a credit card, ensure you can pay back your lender. Additionally, you must find out if you are qualified to have one.
Credit History and Score
Any service involving credit is not something anyone can get. Lenders have a set of requirements and qualifications you need to pass to get their services. The crucial ones are on any form of credit you have built over the years.
Your credit history is the one thing that lenders will be monitoring. It shows any credit service you have used, like if you have a credit card or took out a loan. The most crucial part is that lenders will check if you have already paid them off or if you are paying them regularly.
Besides your credit history, there is also something your lenders can check at first glance: your credit score. It’s a 3-digit number from 300 to 900 that represents how likely you are to pay your debts. A credit score of 660 and above is widely accepted as a good score.
The better the credit score, the more opportunities and deals you can have. You can still try several options if you have a poor credit score. Many lenders offer you an easy loan no credit check to help you.
How to Build Credit
Here are some of the ways you can build credit.
Get a loan or credit card
You can start by getting any credit service, like a loan or a credit card. It would be best if you have a stable income and are above 21 for better options. If you feel like getting a loan, some specifically help you build credit. If you want to use a credit card, you can start by spending on something you can afford to pay.
Have a joint loan/credit card ownership
Lenders can allow joint ownership of a service. Couples and family members usually own joint loans and credit cards. If you have a family member with a good credit score, you can ask if you can be an authorized or joint owner if possible.
Have alternative data credited
If you are making regular payments like rent, you can have it credited to credit bureaus, who can use it as leverage for your credit score.
Credit can be a great way to assist you in tough times financially. As long as you know how it works, you qualify, and you are responsible for handling money, everything can go smoothly should you get one.