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What is Credit?

Without a doubt, the single most important part of your financial situation is your credit. Basically, credit is your financial reputation. Your credit tells lenders, potential employers and landlords how trustworthy you are when it comes to paying your bills on time and exercising fiscal responsibility. It is very important to have good credit: Good credit means that you have a good financial reputation.

Why credit is important

Before you can get a home mortgage loan, car loan, sign up for a cell phone or even get satellite or cable television, all these product and service providers want to see your credit. They want to see whether you have made your payments on time in the past, in order to gauge whether or not you are likely to make your payments on time to them. Even landlords, insurance agents and many employers are starting to run credit checks on you. They want to make sure that you are financially trustworthy and they want to know that you will be responsible for your obligations.

Here are some of the things that can be influenced by the state of your credit:

  • Whether or not you get a loan. From credit cards to home loans to private student loans to auto loans, your credit is one of the deciding factors as to whether or not you get a loan. Lenders will look at your credit report and decide whether they want to trust you to make regular payments (plus interest) until the money is paid back.
  • The interest rate you get on a loan. Interest is a very important part of any loan. This is the money that lenders charge you for borrowing their money. You pay more money for the privilege of borrowing money. However, the interest rate you get is not always the same. Someone with good credit may only pay 5.78% on a home mortgage loan, while someone with bad credit may have to pay 8.9% or higher for the same amount of money. The higher the risk you present to the lender, the more they will charge you interest. That can mean the difference of thousands of dollars over the life of a loan.
  • What kind of housing you can rent. Landlords sometimes do credit checks to see whether they can trust you to make your rent payments on time every month. If your credit is not good enough, some landlords will turn you away. It is getting harder to find a quality rental without good credit.
  • Whether or not you get a job. Some jobs are of a sensitive nature. Security jobs, and jobs where you are put in charge of money, are types of work that employers worry about. By checking your credit, they can decide whether or not you are on firm financial ground. Those who have stable finances are less likely to take bribes or to be tempted to embezzle money from the company.
  • Whether you can get cell phones or television services. Many satellite and cable TV providers have started doing credit checks. Cell phone companies do as well. This is because these companies are providing lucrative services. If you do not make payments regularly, they lose money. By checking your credit, they can see whether you are a risk in terms of late and missed payments.
  • Insurance premiums. Auto insurance and other types of insurance companies are starting to look at your credit score in order to get a general idea of how responsible you are overall. If you have good credit, you might see a premium decrease. With bad credit, you might pay between five and thirty dollars a month or more on your insurance premiums.

Building good credit

You can see that credit has permeated nearly every aspect of your financial life. It has a tremendous influence on the types of job you can get, services you can enjoy, how much money you pay and even where you live. Making sure that your credit your financial reputation is good constitutes a very important priority.

Related Article: How Credit Bureaus Work >>

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