Credit score, good credit and bad credit are very familiar terns even for people who have never had a credit card before. Even though these phrases are familiar to many people, they can be very confusing. This is because even when you have the credit, you do not get to encounter these words on a daily basis. Credits are very important especially when you want to make major independent purchases later in life.
What is credit and what is it used for?
Essentially, credit is borrowed money. You can use credit cards to purchase anything, from utilities to a new home and even a vehicle. All this with comes with an agreement that you will pay the lender back fully at a later time. You will need to build a credit history which is essentially a track record of borrowing and paying back the credit to make large purchases. Building credit will progressively help you buy lager items like property later in life.
How do you build the credit score?
This is where things start to get a little confusing. You need a credit history to get any loan but you cannot establish a credit history without having taken and paid back some loans. So how does this work? Basically, you need a credit history in order to get a mortgage or a loan to purchase a vehicle. You will need to start your credit history from scratch, which can be difficult because you have no credit history.
How will it work? There are several ways to get your credit history going. For instance, there are student loans that allow you to build the credit once you make the payments on the loans. You can also get a secured loan, which is quiet expensive but will get your credit history started. A secures credit card will require you to put down a deposit equivalent to the loan amount or of a certain amount (It depends on the lender) to get things started. Once you start paying back the loan, you will receive some points on your credit. The deposit is an insurance policy or collateral for the bank. Once you complete the payments, you can sign up for an unsecured credit card.
What is a credit score and how can you use it?
The credit score is essentially a three digit number ranging from 300-850. It is linked to your social security number and determined by your credit activity. it is connected to the large purchases you make with your credit card, the small bills you pay and the types of loans you apply and pay for.
Low credit score means you do not make the payments on the loan in time. It could lead to denial of loans in the future. The credit score also impacts the interest rates on items like mortgage loans, car loans and other purchases.
Factors that impacts your score
The 5 main factors that will impact your score include your bill payment, amount of credits you use, length of credit history, types of credit and the number of credit enquiries you have. To know your credit score, you are legally entitled to take a report from the main credit bureaus in your state.