Credit is one of the biggest concerns in personal financing that you should be thinking about. Young and irresponsible people make up the majority of people that don’t have credit or have bad credit. If you’re one of those people and want to learn more about credit, then you’re in the right place!
What Is Credit?
Your credit is your ability to pay your bills on time each month. It shows how responsible you are with your finances. Every person with a social security number is given a credit score to show banks and potential lenders how well you pay your bills.
Every person starts with no credit. To obtain credit, you must get approved for a line of credit and pay back the money you borrow over a longer period. The lender will establish a billing cycle (usually monthly), and over that time you must pay at least the minimum payment they specify.
The lender determines how much money they are willing to lend, the interest rate, and the monthly payment amount. That payment is mathematically calculated to reflect a specific portion of the amount of money owed and the interest rate.
Interest Rates
The interest rate is the fee the lender is charging you for the loan they give to you. Interest rates can be fixed or vary depending on the type of loan you receive.
You can apply for a loan from almost any bank, and they will determine if and how much money they want to lend to you based on your credit score. They also use your credit score to determine the interest rate to charge you.
What Happens If You Can’t Pay On Time?
If you can’t pay the full payment amount or can’t pay it on time, then your credit score goes down. This is called bad credit. Lenders will not want to do business with you or will charge you a large interest rate. This is because the lender is taking a bigger risk by lending to someone that has a history of paying their bills late or not at all.
Living With Bad or No Credit
You can live with bad or no credit; however, it’s harder because you have to find lenders willing to work with someone with bad or no credit. Living with bad or no credit can be frustrating, since you will have more restrictions on where and what you can buy. For example, if you need to buy a car, you will have to save up the funds to buy the car in full upfront or have someone co-sign for you to finance it. You’ll also have to settle for a car you might not want because you can’t afford to buy what you want.
I hope you have gained some knowledge regarding credit and personal financing. Credit is very important and valuable in making big purchases like a car or a house. In the beginning, credit and responsibility may not seem important, but as you age and develop more and bigger goals, it will matter more and more. The more financially responsible you are, the more credit card companies and banks will want to do business with you to obtain the things you want.
