The word “credit” has many meanings in the financial world, but it most commonly refers to a contractual agreement in which a borrower receives a sum of money or something else of value and commits to repaying the lender at a later date, typically with interest. Credit can also refer to the creditworthiness or credit history of an individual or a company. It is your ability to borrow money and make purchases under an agreement that requires you to pay back the entire amount
at a particular time. You might use credit to pay for goods and services you can’t pay for immediately or to earn rewards or cash back on a credit card.

Credit is important because it is part of your financial power. It helps you to get the things you need now, like a loan for a car or a credit card, based on your promise to pay later. Working to improve your credit helps ensure you’ll qualify for loans when you need them. Having good credit makes it easier to do many things, including renting an apartment or buying a home or car, signing up for a cell phone plan, or getting a student loan. With good credit, you can even save money in the form of lower interest rates or waive fees and down payments when setting up utilities.

Having good credit means that you are making regular payments on time, on each of your accounts, until your balance is paid in full. Alternately, bad credit means you have had a hard time holding up your end of the bargain. You may not have paid the full minimum payments or not made payments on time. Unfortunately, negative information generally stays on your credit report for at least seven years, including late payments, bankruptcies, foreclosures, and collections.

Every person who uses credit develops a credit score which is a three-digit number that represents your creditworthiness. It typically ranges between 300-900, with 900 being the highest score possible. Banks and lending institutions check your credit score when you apply for a loan of any sort. Your score helps determine whether an institution will lend to you or not and, if so, at what interest rate they will lend to you.

If you have a low credit score, your loan application may be rejected because you are not deemed to have a good track record of paying back your debt on time and in good standing. Quite simply, your credit score is the credibility of a person to pay back debt based on your credit history. Every person should be familiar with their credit report, and you should do so by requesting and reviewing it yearly for accuracy.

Having a good credit score is important as it not only determines whether credit will be approved but also what interest rate you will be charged. The better your
credit rating, the lower your interest rates will be. There are many factors that contribute to your credit score, including the following:

• Active Credit Accounts: credit cards, overdrafts, loans, late payments, missed payments, defaults
• Credit Agreements: Mobile phone contracts, car finance, home finance

•Payments to buy now pay later services: This allows users to spread the cost of a purchase, interest-free, over a number of months and influence a credit score

The most important factor in calculating your credit score is the timely repayment of loans and credit card dues. In addition, credit utilization ratios (CURs) above 30% are considered a sign of credit-hungry behavior, and credit bureaus reduce an individual’s credit score by a certain number of points if you breach this mark. Therefore, it’s crucial to contain your CUR within 30% to avoid a reduction in your credit score.

One other important factor that negatively impacts your credit score is if you submit multiple credit card or loan applications within a short period of time. In fact, making multiple loan or credit card applications within a short span will reduce your credit score very quickly. It’s important to remember that your credit rating score is not always accurate and that is why it is important to thoroughly review your credit report once a year.

There can, in fact, be occasional misinformation so you must cross-check if the transactions done in the credit report have been done by you and that the figures are accurate. In the case of a dispute, you should contact the credit bureau for a correction as any wrong information can adversely impact your credit score.
For most consumers, building a solid credit history is an important step in establishing your financial security.

Not only is credit vitally important to borrowing at favorable rates, but it can also help you get a job, get into an apartment, lower your auto, or house insurance rates, avoid a deposit on a utility agreement, and more. Keeping your credit utilization low, for example, frees up money you can use like saving for a down payment for a car or home, for retirement or for your child’s future education. A good credit score will also save you money on loans you take out, again leaving more money available to help you get on strong financial footing. Establishing a solid credit history can take time, effort, and a lot of patience, but it IS possible.
The good news is that bad credit can always be improved.

Practicing the following good credit habits can raise a low score and help maintain a good score:

✓ Use credit regularly so lenders know you can be responsible
✓ Establish a positive payment history by making your payments on time every month. And, if you have fallen behind, get caught up asap
✓ Keep your credit card balances low so that you can consistently pay them on time and in full each month
✓ Borrow wisely and avoid borrowing unless you absolutely need to
✓ Keep track of your credit score and reports

✓ Monitor your credit report to ensure there aren’t mistakes
✓ Avoid too many credit inquiries in a short period
✓ Protect your finances by always watching for fraud and scams

The best time to start working on your credit is now. Regardless of how many negative items you have on your credit report, their impact can diminish over time as you add new, positive information.

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