When it comes to personal finance basics, beginners like to focus on the day to day. When we’re getting on our financial feet, we like to think about things like how often we’re eating out, how much we’re leaning on our credit cards, and how fast we’re able to pay off our student loans or other debt. And while each of these factors is important, there are more fundamental ways that people can put themselves on the path to future financial stability. One of those is to pay more attention to the health of our personal credit.
Credit histories are maintained by three different credit reporting agencies. These are independent companies that keep a close watch on you, dear consumer. Every time you pay a bill, every time you get a new credit card, every time you forget to pay your minimum account balance until a week after it’s due – the credit reporting agencies know. They know because they’re the ones who tell lenders whether or not you are responsible. Lenders don’t want to give you money only for you to never pay it back. Instead, they look at your credit history (crystallized into a single, three-digit credit score) and decide how much to charge you for borrowing their money, or to lend/not lend to you at all.
AAACreditGuide is a great way to learn about your personal credit, not only what you personal history actually is, but what it means for your life. This is the problem that most people have with learning about credit. It all just seems like information. Where does the rubber hit the road? When do we start to FEEL what personal credit it all about. The thing is, personal credit is very important in determining your financial future. People with low scores are disadvantaged. When it comes to borrowing, they’ll always be charged much more than people with strong credit, or not be issued a loan at all.
For those who aren’t approved for loans, this keeps them from achieving many aspects of the so-called American Dream. Without borrowing, most people can’t send their kids to college. Without borrowing most people can’t get that new car they need to drive to the job across town. Without borrowing, people can get stuck in rental homes forever, paying hundreds of thousands of dollars into someone else’s equity. These are extreme cases, but millions of people find themselves in these stories. Not so extreme, after all.
Those who have good enough credit to receive loans will still pay an arm and a leg for it. Paying so much money to borrow money puts people in nearly the same situations described in the previous paragraph. The only way to get out of these credit death spirals is to improve the credit. Pay off your bills, don’t keep balances on credit cards whenever possible, and don’t open new charge accounts. There are other methods, but if you are able to live responsibly with your money, your credit score will eventually reflect it and you will be able to advance.