You’re probably already familiar with the concept of “credit,” the idea that if you build up a reputation for paying bills and debts on time, you’ll be better able to borrow money in the future. Your credit is one if the most important aspects of your personal finances. Credit is important because it enables you to borrow money when you need it. In addition, the better your creditworthiness, the more cheaply you’ll be able to borrow money, whether for a car, education, home, or some other large expense. On the other hand, if you are not a good credit risk, you may not be able to borrow when you need to, or you might be able to borrow but only at a very high interest rate. Your creditworthiness may also be important when you are looking for certain types of insurance, and when you apply for certain types of jobs.
Credit is used primarily in order to obtain loans. Loans can be an excellent way to fund large purchases and business initiatives, but managing debt can be a complicated process. Let’s face it: It can take just a few months to get into financial trouble and years to get out. Although debt is sometimes useful, there is a difference between good debt and bad debt. The two most important characteristics are how you borrow the money and what you do with it. A mortgage is usually good debt, since you probably couldn’t afford the house otherwise, the interest rate is relatively low, and the interest is usually tax-deductible . Borrowing to pay for an education is usually good debt, because it’s an investment in future earnings . Carrying a balance on your credit card at a high rate of interest is bad debt, especially if the money was used to buy luxury items or things you didn’t really need. Even though debt is a part of life, the key to preventing it from becoming destructive is knowing its benefits and risks.
The following five steps can help you take control of your credit situation:
- Get your credit report, determine and understand your credit rating.
- Understand the risks of credit fraud and how to protect yourself.
- Understand your rights.
- Correct any errors.
- Work toward improving your credit score.