Credit is often referred to as borrowed money from a lender who trusts that you will repay the debt in full plus any associated interest fees. Although using and repaying credit may seem easy, it is important to be careful with how you use credit. If you’re not careful, misuse of credit can lead to high debt.
Why is good credit important?
When you are trying to purchase a car or home, lenders look at how good your credit is and make their decision based on your credit score and credit history. Your credit history lets lenders, landlords and employers know how you have managed your money in the past. It helps them decide whether or not to take a monetary risk on you.
What is a credit score?
Before you are offered a line of credit from a lender, they must determine how risky it would be to offer you credit. Amounts owed on accounts and how often you pay off your debts are factors in deciding how much risk is involved. Lenders prefer higher credit scores because they involve less risk. Lower credit scores typically indicate poor debt management. It may be risky for a lender to offer a line of credit to someone with a lower credit score because their score indicates they may not manage their credit well and the lender may never be paid back.
Credit cards offer many advantages. They offer you the convenience of being able to make purchases with the security of not having to carry cash. When you use a credit card, you are essentially borrowing money from a bank or financial institution with the promise to repay it in a month when the credit card bill arrives.
The key to getting out of debt is to act now. Don’t procrastinate. Be proactive about your finances by creating a plan for tackling your debt. This plan will put you on the path toward a better financial future. For most people, it takes years to become debt-free. As time passes you will gain a better understanding of your necessary and unnecessary expenses. Keep in mind you may have to adjust your spending habits to eliminate expenses that are contributing to your debt.
Find out how much debt you have
Start by making a list of everything you owe, whether it’s a monthly mortgage or rent payment, a credit card balance, or even money you borrowed from family or friends. Totaling up those amounts will provide you with an overview of your debt load. Looking at the numbers can be worrisome, but this is a positive and necessary first step to tackling your debt.