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What is Credit and How Do You Establish It?

Posted by Lakeshore Ford on Thursday, May 2nd 2013

One of the most confusing things for a wide variety of people is the word “credit” and how important it is to their financial history. Too many kids get credit cards without understanding what it means and end up building a poor credit score without even realizing its meaning. Understanding credit and how to establish it is an important part of growing up and buying vehicles.

Credit Definition

Credit is basically the idea that you can be trusted with other people’s money. Using a credit card is buying something with somebody else’s money with the promise that you’ll pay it back. A good credit history shows that you have borrowed other people’s money regularly and paid it back without any serious problems.

How Do You Establish Good Credit?

Basically, you have to use your credit cards and pay them back on time. Any time you borrow money, you have to pay it back and in full. If you can’t pay it back fully, pay over the minimum amount to save a lot of money and payments in the long run. Consistency is vital in establishing credit: being late with a payment can give worsen your

credit score and make it more difficult to get loans for items like vehicles, a house, or school.

I Have No Credit/Bad Credit. How Can I Improve It?

Having bad credit is not the end of the world, although it can feel that way. Your credit score can increase as long as you start making payments and stay consistent with it. Paying off a credit card or a loan instantly boosts your credit in the eyes of lenders. You should also try to open up a bank account as this can help boost your credit slightly. Employment history is also important: getting and holding a job is important to good credit as it shows you’re reliable and know how to make money.

When All Else Fails…

A store account credit card can be an easy way to start establishing credit. Get one for a couple hundred dollars and buy a few things with it. Pay it back as soon as possible and continue to use the card, paying it off as soon as possible. This will help you establish a solid credit base to build off of later. Avoid going overboard with this route as these store credit cards often have huge interest rates.

Category: Credit

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