Understanding Credit

“Cash is King” has been preached throughout the decades. Could it be that “Credit is King”, and “Cash is Queen”? Some financial instructors are taking it a step further advising to use cash only and never use credit. Others say that credit is good if managed properly. Which side of the fence do I stand on? I teach that credit and cash have their place. They do not compete. We simply should learn and understand how to manage credit wisely.

Let us begin to explore credit for a better understanding of what it is, why we need it, why is it important, its risks, the report, the score, and where it is reported.

What is credit? Credit is the trust between the Lender who provides money or resources to the Borrower who received the money or resources. There is a legally enforceable agreement for the Borrower to repay the Lender later. In a nutshell, credit allows us to get things now based on our promise to pay later.

I can remember the first time that I got a credit card in college and was surprised when I received the bill. I felt the blood drain from my face as I stared at the amount due from a poor college student. My mistake was using credit not fully understanding it. Well, you can imagine what happened next and it was not pretty.

Why do we need credit? It is rather simple. There are some things that we cannot pay for with cash such as a car, a home, or college education. Also, the United States is a credit-based nation and society is becoming increasingly dependent on credit to make purchases and financial decisions. If you have ever purchased a home, car, or furniture, you more than likely used credit.

Why is good credit important? It gives us credibility, shows that we are trustworthy, and contributes to our ability to build wealth. Imagine that you want to be a Business Owner or Real Estate Investor. How successful will you be if you do not have access to credit?

Companies and financial institutions review credit for the following:

  • A new loan.
  • Interest rates and fees on the loan.
  • A new job.
  • An apartment or home rental.
  • Student loan eligibility, including most private loans.
  • Car or homeowner’s insurance.

Having good credit takes the power away from companies and puts you in the driver’s seat to use credit for smart money moves.

What are the risks of credit? The biggest risk is the mismanagement of credit. Credit is a tool, and like most tools, it can be misused and abused. When we do not know how to effectively use a tool, we are in danger of getting hurt. Well, it is the same with credit. I had some painful experiences that hurt badly! I paid high interest rates of 29%, late fees, and was declined for credit or purchases. It was embarrassing! The handwriting was on the wall that I needed to make a change. Today, my credit score is 835 and I no longer apply for credit. Credit offers fill my mailbox every day. I am back in the driver’s seat!

What is a credit report? A summary of how we used credit in the past. Creditors report our activities every 30 days, at the end of each month, to agencies that store the information. Our credit history describes how we use money.

  1. How many credit cards do you have?
  2. How many loans do you have?
  3. Do you pay your bills on time?

If you do not know your credit history, you can get a free copy of your report at www.annualcreditreport.com or contact the credit reporting agencies directly. They are listed below.

What is a credit score? It is like a report card grade that tells how well we used credit. Our score consists of payment history, amounts owed, length of credit history, new credit, and types of credit used. See the diagram below.

The following are some basic guidelines for interpreting a credit score:

  • 801 and above – Nearly perfect credit
  • 751-800 – Excellent credit
  • 721-750 – Good to excellent credit
  • 691-720 – Good credit
  • 621-690 – Fair credit
  • 620 and below – Poor credit

Your credit score is provided to you whenever you apply for credit. However, if you do not know your score, you can go to www.myfico.com or www.creditkarma.com. My FICO provides the actual score whereas, Credit Karma provides a “ballpark” score.

Where is credit reported? There are three agencies that stores our credit information in their database. They do not rate credit. They collect the information reported by companies and provide that information upon request. You may contact these agencies directly to request a copy of your credit report.

There are three major credit bureaus:

  • Equifax®: PO Box 740256 Atlanta, GA 30374 (800) 685-1111, www.equifax.com
  • Experian®: PO Box 2002 Allen, TX 75013 (888) 397-3742, www.experian.com
  • TransUnion®: PO Box 1000 Chester, PA 19022 (800) 916-8800, www.transunion.com

Each agency is required by law to provide one free credit report annually. However, you can request a copy of your report weekly during the COVID-19 pandemic. Join me and request a copy of your report today.

I hope that this information helped you to understand credit and its importance better. Once I understood it, Credit became my best friend. A “friend” that is there always when I need it. I never leave home without it. Please contact C.A.N. Financial Services at 832-496-0886 if you would like to learn more about credit.

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Contact me today for a free 15-minute consultation at 832-496-0886 or at daly.cynthia@CANfinancial.biz to begin your financial journey right where you are.