All You Need To Know About Credit

| September 17, 2016 | 0 Comments

For many people, credit is something they don’t understand. And yet, it’s one of the most used terms in the finance industry. People apply for credit cards; they have credit ratings, etc. If you don’t know anything about it, then it can be a hard thing to handle.

Furthermore, it’s a topic that everyone needs to understand. There will be a time in your life when you come across the term in a financial situation. So, you need to know what it is, and how it’s relevant to your personal finances.

In this guide, you’ll find out all you need to know about credit. I’ll try and make things as easy to understand as possible. But, bear in mind that things may get complex. Still, by the end of this post, you’ll have a lot more knowledge under your belt.

Defining Credit

To start things off, it makes sense to define credit. In simple terms, credit is something of value that you borrow from a lender. The easiest way to explain this is to look at credit cards. They are cards that are loaded with money for you to use. It’s given to you, and you can make purchases using the card throughout the month. You’re also given a billing date by the company that gave you the credit card. When this date comes around, you pay for all the credit you used.

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What Are Credit Limits?

Naturally, it would be insane to grant everyone unlimited credit. People would go crazy and spend as much money as possible. Then, they wouldn’t be able to pay it back on time, and end up going into debt. So, lenders have something set up called credit limits. This is a limit on the amount of credit an individual is granted. When you apply for your credit card, the company will give you a certain limit. They’ll say look, this is the maximum amount you’ll get on a credit card from us. If you agree, then you agree to stick to that limit. Now, if you’re irresponsible, you may go over this limit. In which case, the lender can hit you with fines and additional charges.

It’s worth noting that the credit limit can change over time. If you’re paying your credit bills on time, then the lender may increase your limit. They trust that you can afford it, as you’re keeping up with all your payments. On the flip side, missing repayments is a surefire way of getting your limit decreased. Furthermore, your credit limit is decided by numerous factors, including your credit score.

What Is A Credit Score?

This is probably one of the most asked questions with regards to credit. Everyone wants to know what a credit score is. If you’ve ever looked into getting a personal loan or applying for a credit card, you’ll see mentions of a score. In short, it’s your creditworthiness. Your score determines how worthy you are of the credit you’re applying for. It’s a way for lenders to separate people. They want to be secure in the knowledge that their money is in safe hands. So, a lot of lenders don’t want people with bad credit. If your credit is so bad, you can be refused various financial applications.

There are multiple things that come together to determine your credit score. Most notably, it boils down to your credit history. Past loans and repayments are all taken into account. If you’ve ever had a bill that needs paying, it’s noted on your credit report. The timing of your payments also comes into account. If you pay bills on time, then your score will increase. The amount you owe also plays a massive role too. If you’re in debt to multiple lenders, it pulls your score down lower. It’s also worth noting that some people refer to your credit score by using the term ‘credit.’ If someone says you have good credit, then they mean you have a high score.

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Does My Credit Score Change?

Another thing many people want to know is whether or not their credit score changes. Yes, your credit score can fluctuate over time, it isn’t a set value. This means that people can get themselves good credit if their score is bad. The good thing is, there are many ways that you can influence your credit score. All you have to do is look at the things that affect it.

For example, I just mentioned how repayment timing makes a huge difference. So, focus on making all of your payments on time. Slowly but surely, you’ll see an improvement in your score. Perhaps the main thing to focus on is getting rid of as much debt as possible. If you owe too much money to too many people, it looks bad on your report. So, make debt paying a priority, and watch your score improve.

How Do I Find My Credit Score?

Before you apply for credit, you’ll want to know your credit score. Some people are unaware that you can check it yourself. They think that financial institutions are the only ones that know your score. But, you can actually carry out credit checks by yourself at home. There are many websites that allow you to do this at any given time.

The benefit of this is that you get to see your detailed credit report. Consequently, you’ll see whether or not you have good/bad credit. Plus, you see all of this before you spend time applying for something. As a result, you can look at ways of building up your credit if your score is bad. So, you can then apply for a credit card or loan with more confidence of approval. Too many people apply for things without checking their credit report beforehand.

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Is My Score Needed When Applying For All Types Of Credit?

For the majority of things, you will need a good credit score to be approved. This includes applying for a credit card or a big personal loan. Credit checks will be carried out, and your score will determine how much you get. However, there are some instances where a credit check might not be needed. Some loans don’t require credit checks, so, people can apply even if they have bad credit.
It’s understandable that all of this information can be a lot to take in. But, I hope you’ve managed to gain more knowledge on this subject. It’s worth noting that some big financial moments will revolve around credit. The biggest I can think of is buying. To do so, the majority of people need a mortgage. And, this requires you to have a good credit score. Otherwise, you can be denied the credit, and won’t be able to afford a house. As you can imagine, this puts you in a very difficult situation. I’ve mentioned them plenty of times, and credit cards are a big part of your personal finances. It makes sense to have one; they can help with big purchases and come with benefits too.

I’ll end this post with a few of my final thoughts. Firstly, remember that credit is, essentially, borrowed money. So, it will always have to be paid back. Secondly, I advise everyone to keep track of their credit score. Ensure that you have good credit, as it can help you with many financial situations. Thirdly, understand that bad credit isn’t the end of the world. Don’t be depressed if your score is low, just work on building it up.

Category: Credit

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