What Is Credit?
Establishing Good Credit and Criteria for Getting Credit.
Credit is defined as "financial trustworthiness" and confidence in a borrower's ability and intention to repay. Credit is a promise for repayment on a debt. Credit is used to obtain loans to purchase goods and services. The credit you have will determine how much you will be allowed to borrow, for how long and at what interest rates.
Building a good credit record is an important step in reaching financial independence. Lenders offer better terms and lower interest rates to consumers with good credit ratings. Responsible use of credit is obtained by living within your means. Otherwise, credit can become one of the greatest obstacles to achieving financial independence.
Your credit history is the record of everything pertaining to any credit you've ever had or applied for. If you want to borrow money to buy anything, you'll need credit. It's not hard to establish a credit history these days. Credit cards are plentiful and available. The trick is to develope and manitain a healthy credit history.
You're much more likely to be approved for a loan if you have a good record of paying off debt on a few credit cards, or even one card, than you would after you have been bogged down with a dozen cards that got away from you. Keep in control of your credit cards and your debt and make sure your payments are on time. Know when enough is enough and establish a good, responsible record of paying back debt.
Different types of credit
1. Revolving Credit is a type of credit that does not have a fixed number of payments. Credit cards are considered revolving credit.
2. Installment credit is a type of credit that has a fixed number of payments such as car loans and loans for appliances and furniture.
3. Mortgage credit - Mortgage credit is like installment credit but is harder to get. Banks and credit unions provide this type of credit for the purchase of a home, condo, land or other real property.
4. Unsecured Credit are loans that do not require collateral.
Appropriate use of credit
In general, credit is best used to purchase assets that are likely to appreciate in value or increase your earning potential, such as a house, an education or a business venture. Misuse of credit is used to stretch out payments for items that will lose their value quickly or be used up, like vacations, entertainment and food.
Potential problems that can result from the use of credit
The misuse of credit can have disastrous effects on individuals and families, causing everything from mild anxiety to a complete breakdown. Serious debt generally doesn't happen overnight, instead it builds over time with each decision you make to use credit.
Learn to recognize the signs of a problem and develop possible solutions before you need them. Otherwise you could do a great deal of damage to your credit record and lose the advantages of a good credit record in the future.
Here are five common signs that your credit may be out of control:
1. You are at or over the limit on your credit lines.
2. You can only afford to make minimum payments on your current credit cards.
3. You are unable to estimate how much you owe.
4. You use one credit card to pay another credit card bill.
5. Your payments on debt exceed 36 percent of your income.
