Credit when used correctly is a great tool to conduct business. If you use credit cards, they are a great convenience. You don’t have to walk around with much cash to conduct business. Without credit the majority of people couldn’t purchase a home. Imagine having to pay for a home upfront with no credit. The housing market would be non-existent.
Although credit is great when used correctly, it has its many disadvantages when used incorrectly. Many individuals don’t use credit for their advantage; they use it to their demise. Many individuals abuse the power of having credit by maxing out their credit cards, opening up too many accounts, missing or skipping payments, making late payments and defaulting on their loans. This results in ruining their options for borrowing money, ruining their credit history and may even ruin unrelated opportunities such as losing a job opportunity or ruining their marriage. Unfortunately in today’s world there are unscrupulous individuals who will steel your credit, via identity theft, and ruin your credit.
Poor credit can be fixed. You can repair your credit yourself. It’s not rocket science. There are no tricks to it. It’s a matter of educating yourself first, creating a plan and then implementing it. You may have to develop good spending habits, living on a reasonable budget and develop safe borrowing practices. With time and hard work, your credit will improve so you may enjoy the advantages of having good credit.
Credit comes from the Latin word “credo”, which means, “I believe.” The underlying beliefs of credit are:
- Do you do what you promise?
- Are you a trustworthy individual?
- Are you a believable individual?
- Do you have a good reputation?
The concept of credit is quite simple. It basically means that you receive something now in return for you to promise to pay for it later. It allows you to spend money now, that you plan on earning later. If you have the money, it allows you to conveniently spend money without running to the bank or walking around with cash.
The concept is based on trust. But how do lenders trust consumers? They look at their historical behavior, which is a great indication of their future behavior. This is why credit reports and credit scores were created to determine your:
- Character - Do you do what you promise, are you reliable, and are you honest?
- Capacity – How debt can you handle with your income and other debt?
- Collateral – What assets do you have to repay your debt if your income is lost?
Unsecured Credit is riskier for lenders because there is no asset used as collateral. The interest rates are higher and the term shorter when compared to secured credit. The credit is backed by a promise and not by an asset (collateral), causing more risk for the lender. Credit cards are unsecured credit.