Everyone hears about the terms credit, credit report, and credit score most of the time, but few know exactly what they really are.
What is Your Credit Report?
Your credit report is a file that lists down your credit history, from the moment you first obtained credit to your current credit standing. It contains all information related to your debts, such as outstanding balances in your loan and credit accounts, types of accounts that you have closed or have kept active, your credit limits in each account, and your payment histories. Your credit report also lists down public records against you, such as bankruptcies, repossessions, foreclosures, tax liens, and judgments.
What is Your Credit Score?
Your credit score is a three-digit number that pretty much rates how good or bad a borrower you are. It is calculated based on how timely you are with your payments, how you keep your balances below your credit limit, the mix of credits that you have, and your average age of credit.
Why is Credit Important?
Your credit is important because it affects your ability to borrow money. The higher your credit score, the better your chances of getting approved in every loan or credit application. However, even if you don’t intend to borrow money, there are other aspects in life wherein you can see the importance of credit.
First, not only is your credit necessary if you’re trying to apply for a mortgage loan, but it is vital even if you’re just renting an apartment. Many business owners, including landlords, would like to determine if you habitually make payments on time, and they will pull out your credit report in order to see that.
Second, credit also affects your ability to apply for utility or mobile phone services, for the same reason that these companies like customers who pay diligently. If you have bad credit, it would be hard to get approved for these services without shelling out a security deposit.
Lastly, good credit can help you find better employment or achieve your well-deserved promotion. Nowadays, credentials alone aren’t enough. Most employers are cautious when a person has bad credit because it might reflect financial distress and irresponsibility.
How Soon Should a Person Start Building Credit?
Ideally, the best time to start obtaining credit is during college or as soon as the person reaches legal age. This can help establish financial discipline early on. While people in this age group might be the most risky borrowers, they are also the ones who can become financially successful sooner if guided and taught properly.
What You can Do to Protect Your Credit?
While obtaining credit alone is challenging already, maintaining it requires extra effort. To start with, make sure to always pay your bills on time. Keep constant watch of your balances and as much as possible pay off every balance in full. Keep your old accounts active and maintain a good mix of revolving and installment accounts. Additionally, you should protect yourself from identity theft, which can ruin your credit and everything you’ve worked for overnight.