What is Credit?

Image of a dog using a credit card to make a retail purchase using a POSEveryone has their own answer to the “what is credit?” question and of the many definitions, the general idea is always the same. Credit is the ability to obtain goods or services before payment, based on the trust that payment will be made in the future.

So to be clear, credit is nothing more than Company A, which could be a department store like Macy*s or a gas company like BP or Mobil, allowing you to walk out the store with that pair of shoes or leave the station with a full tank of gas on your promise (and their trust in your promise) that you’ll pay them somewhere down the road.

We know that there’s a clear benefit for companies to trust that people will actually pay them back. For starters, they can sell more product when they don’t have to worry about their customers not having cash on-hand. For the consumer, the terms aren’t bad either. Generally speaking, most credit cards allow you until the end of your credit billing cycle (the day your credit card bills need to be paid) to pay your debt and those that need a little extra time to pay the credit debt have the option of paying a little bit at a time (i.e., the minimum payment) until the credit is paid off.

Beyond the smaller purchases like clothes and groceries and household items, there are also bigger purchases like surgeries, home improvements and renovations, new cars and houses. If you’re like most, you probably aren’t walking into a car dealership with a briefcase full of cash. You’re even less likely to do this when you’re buying your home.

This is where lenders come in. Lenders will “credit” you based on your ability to repay the loan (notice we didn’t say only if you have a high credit score or earn a lot of money).

Through personal loan products like surgery loans, home improvement loans, renovation loans, new car loans, home loans, etc., lenders make it possible for merchant retailers and service providers to leverage credit to sell even when the buyer doesn’t actually have the money to pay (right now). Lenders worry about that so merchant retailers don’t have to. They’ve even gone as far as creating merchant cash advances to further help small businesses access their cash even sooner.

We All Have Credit

One of the beautiful things about credit, at least in this country, is that everyone has some sort of credit (or the ability to obtain credit). Sometimes you have credit and don’t even realize it. Here’s the story of a someone in Ontario, Canada getting a credit card offer for their deceased dog.

After knowing what credit is, the next most important thing to know is where you stand with regards to yours. Building and maintaining a good credit record is accomplished by creating a “good credit history” and is an important step in getting the best loan options. A lot of people do this by:

  • Applying for and using a credit card for purchases
  • Using student loans for college tuition and books
  • Making [at least] minimum payments due
  • Paying debts when they’re due

Another important, and probably most critical step for people looking to get the best loan options, regardless of whether or not they have good credit, is using a loan service that matches you to the best terms and for your specific situation.

Tips for Ensuring Good Credit Record

Looking for more ways to ensure good credit? Here are a few more tips:

  • Control your credit card spending. A common guideline is to spend about 20% of your after-tax income and not allowing your monthly credit card payments to go over 10% of your income.
  • If you already have debt, try to cutting your expenses. Anything that isn’t necessary should be cut. Lenders typically base lending decisions on money owed (debt) compared to your income.
  • We can’t stress this enough… if you use a credit card, pay your bill on time every time! Minimum payments are exactly that. Minimum payments. Paying more than the minimum whenever possible is generally the best way to avoid late fees, prevent possible damage to your credit record and pay off your credit debt.
  • Know your credit limit and keep from going over it. Going over your credit limit is a sure way to rack up rack up additional fees which will get you further past your limit and if you’re not careful, you could end up paying compounded fees month after month.
  • Not receiving your credit card statements? This is more common than you’d think but the worse thing you can do is to let this go unchecked. Without your credit card / billing statement, you won’t be alerted to changes that affect your monthly payments and can eventually lead to missed payments, over limit credit spending, etc.
  • Save the ATM withdrawals for your debit card. Credit card cash advances typically don’t give you a grace period to pay back the advance. The interest meter usually starts running the moment you receive the advance from your line of credit and you’ll end up paying a fee for accessing your credit line this way.

Think you know about managing your credit? Take AmOne’s Credit IQ Test and see how much you really know.

When Credit Doesn’t Go Our Way

Things don’t always go as planned. We sometimes use credit with all the best intentions and then things just happen. Sometimes we’re just not in a financial situation to do the things we know we should and even making minimum payments sometimes aren’t an option. Here are some things to consider if you find yourself in this type of situation:

  1. If you’re even unable to make you credit card payments, stop using your credit cards. Take it a step further and remove the cards from your wallet / bag. Leave them at home. The temptation to spend is usually greater when you’re feeling down.
  2. Contact your creditors. Too many people do the opposite and instead avoid talking to creditors. This hardly ever ends well. Creditors just want to get paid. Moreover, they want to do it in the most efficient way possible. To that end they will try to work with you, but you have to communicate. Worse case scenario, they’ll know your situation and can set follow-up call schedules with you. This is far less stressful than having them calling you during work hours, while you’re trying to wind down in the evenings and on weekends.
  3. When you’re finally able to work out an agreement with your creditors, note the name of everyone you speak to and the specifics of the deal. Get all their contact information and follow up with letters confirming payment agreements and include all the details (including who you spoke to and their employee number, when applicable) until your specific credit problem has been resolved.
  4. Even if you can’t do anything about your debt today, you should create a plan to repay your debt so you’re prepared for when things do get better. The last thing you want is to compound your credit problems. That’ll put you in a worse [credit] position and will impact your loan options when you eventually do need some funding and believe us when we say, these things creep up on you when you least expect them.
  5. Pay off your credit debts. Making minimum payments will generally extend the amount of time you hold onto your credit debt so do your best to pay as much as you can towards the debt until it’s paid off.
  6. After you declare bankruptcy you could still owe portions of your debt, it will not necessary leave you with zero debt. Bankruptcy will also stay on your credit report for up to ten years.
  7. Before declaring bankruptcy, it’s important that you explore alternatives. There may be a better option right under your nose… maybe all you need is someone to let you know it’s there.

The Takeaway

After reading this, you may decide that spending countless hours learning the ins-and-outs of “credit” and researching all the things you could do to repair yours could be better spent doing things you actually enjoy or spending time with friends and family. If so, it is worth the investment to talk to a knowledgeable associate from AmOne, many of which are also unsecured loan specialists (especially since the call is free and they won’t try to sell you anything). You can find out how to reach them here.