With so many moving parts in today’s world, the most impactful yet the least taught, the system of credit will benefit you if you are good with your credit or haunt you if you made poor decisions in the past. Let’s dive into what credit is and why having good credit will benefit you much more than you could ever think.
What is Credit?
Let’s start with the basics of this simple yet complicated subject. Credit, in short, is a system put in play to determine how well an individual is at paying backing money that was “accredited” to them over a significant period of time. The key word there is “significant period of time”. It is important to understand that credit takes time to build and usually takes years to build your credit to a strong enough standing in order to be seen as “credible” or “creditworthy”. This is usually determined by paying back credit cards, loans, and other lines of credit on time and in line with the terms given by the credit grantor.
A credit grantor, or creditor, is a bank, lender, or financial institution that provides consumers with lines of credit. These creditors are the ones that report to the three major bureaus (Equifax, Experian, and TransUnion), and will document your payment history. Paying on time or even ahead of schedule does two things: It helps build a rapport with the creditor which will make obtaining additional lines of credit with that creditor easier in the future, and it also helps reflect your payment history in a positive way in the eyes of the bureaus, which in turn gives you a strong credit standing.
The Different Types of Credit
There are two main types of credit that are obtained by the overwhelming majority of consumers today: Revolving Credit and Installment Credit. There are additional lines of credit such as Service Credit, Open Credit, and others, however, those lines of credit are extremely rare and more often don’t report on your credit unless you get behind on payments.
Revolving Credit, or revolving debt, is the most common type of credit as it is one of the easiest and quickest credit types to attain. Revolving credit is a great and flexible line of credit due to being extended a credit limit, where you can use up to that limit and repeatedly borrow it on a monthly basis. You can repay the current balance due in regular payments and each payment (minus interest and any fees) replenishes your available credit to use. Credit cards are the main source of revolving credit and are one of the most impactful items to have on your credit report for multiple reasons. Revolving credit makes up the largest portion of your score, taking into account your credit card utilization (the amount owed to the limit granted) and your payment history. Paying your cards on time and maintaining a low balance will help your report not only look good in the eyes of the major bureaus but also show the creditor that you can repeatedly pay back your debt in a timely manner.
Installment Credit, or installment debt, is another common line of credit, however, is less attained compared to revolving credit. Installment credit is a line of credit extended to a consumer to pay back in fixed monthly installments, usually set based on your score, report, and the value of the loan. Typically, installment credit is used to obtain larger commodities, including car loans, house loans, boat loans, personal loans, business loans, etc. The reason why installment debt is less attained than revolving debt is the ease of obtaining it and its practical use every day for it. More often than not, most people will only obtain 1 house and 1 car (at a time), while that same individual can have 4, 5, or even 6 credit cards at a time. It’s not to say that installment debt isn’t useful, it is extremely impactful on your credit report and will help you obtain more lines of installment debt, it is just a periodic line of credit obtained and paid over 1+ years.
What are the Benefits of Having Strong Credit?
Now that we’ve covered credit briefly and the lines of credit usually obtained by most individuals, let’s dive into the benefits of having good credit and where it can take you.
1 Lower Interest Rates
Probably the biggest benefit of having a strong credit score and strong credit reports is being able to obtain lines of credit with significantly lower interest rates. Interest rates are one of the biggest reasons today why houses get foreclosed and cars get repossessed. Having a lower interest rate reduces a lot of the cost of obtaining and paying back the line of credit, which alleviates a lot of the pressure you can have on your wallet. The ability to also refinance at a lower rate if needed, makes car payments, mortgage payments, and even credit card payments easier to pay, less stressful, and more enjoyable to use.
2 Ease of Obtaining New Lines of Credit
The last thing you want to deal with is applying for a car or home, and getting rejected or hearing those dreaded words “Do you have anyone who can co-sign for you?”. Having good credit will make getting new credit cards, new cars, new homes, new business loans, and new personal loans, much, much easier and even quicker. The better your credit is, the more opportunities you will when obtaining new lines of credit.
3 Building your Business
For those with established businesses or looking to start a business, when diving into the world of business credit, you will have to have a strong personal credit report before you can truly begin developing your business’ credit. When starting your business and begin obtaining lines of credit under your business name, your personal credit will be attached and you will be the personal guarantor of the line of credit extended to your business until it has developed enough to obtain lines of credit on its own. Until then, having a strong personal credit report will be the difference-maker in building your business credit and bringing your business to new heights and receiving the funding needed. Be sure to check out our Business Credit Article and Business Credit Program.
What are the Negatives of Having Bad Credit?
If you have a low credit score, poor payment history, or even derogatory items on your report, you are not alone. The majority of Americans today have poor credit scores and reports due to several reasons. The biggest reason is the lack of education given to young Americans growing up in today’s society. Unfortunately, credit is the most impactful subject in everyday life, yet the only ones who truly learn about credit are those lucky enough to be raised in a household with parents with strong credit who instill it into their kids. There are a lot of drawbacks of having bad credit let’s see what this leads to.
1 Higher Interest Rates
When your credit is not strong, any line of credit you are able to obtain will be attached with a relatively high-interest rate. These high-interest rates lead to a constant headache of paying much more than the line of credit may be. In most situations, loans are notorious for having a higher interest rate, with your first year of payments used to pay back the interest of the loan before the principal. They are designed to attain as much of the money lent as quickly as possible to protect the creditor from the high probability of having payments being missed.
2 Difficulty of Obtaining New Lines of Credit
Some of the best credit cards, low-interest rate loans, and even finding a place to rent become extremely difficult and stressful if your credit is poor. When your credit score is low and your reports are relatively weak, you will be seen as a financial risk to any creditor which will make obtaining new lines of credit to redeem your past mistakes even harder. It’s frustrating but understandable if you place yourself in the shoes of the creditor. This usually leads to people having to get cosigners, begin trying to fix their credit, or ultimately give up. Do not give up on your credit, that is the only way to make it getting mortgages, credit cards, and other loans easier.
In Conclusion
With credit today being so impactful, having a good credit score and report will help you in many ways. Whether you are looking to purchase a home, a new car, or even jumpstart your business in pursuit of success. Having good credit will help you obtain new lines of credit easier, save hundreds or even thousands of dollars in interest rates, and allow you to live the life you truly wish to live. If your credit is holding you back from your financial goals in life, don’t give up on your credit. There are plenty of resources available in order to repair your credit or even strengthen your existing credit. Check out our Personal Credit Repair Process, where you will be able to work 1-on-1 with a credit specialist in helping you achieve the goals you have set. At Credit Supreme, your goals are our goals, and we strive to help you accomplish them.