What Is Credit and Why Does Good Credit Matter?

Do you know what credit is? It's the ability to obtain goods or services before payment, but you should also know why good credit matters.

Credit is the ability to obtain goods or services before payment, based on the trust that payment will be made in the future.

There’s a clear benefit for companies that extend credit to trust that consumers will pay them back.

For starters, they can sell more goods and services when their customers don’t have cash on hand. They can also earn money on the interest the consumer pays when they don’t pay the entire amount off each billing cycle.

For the consumer, the terms aren’t bad either. Generally, 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, 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.

Through personal loan products like medical loans, home improvement loans, and debt consolidation loans, credit makes it possible for you to pay for necessary expenses even if you don’t have the money to pay for them upfront.

Compare Your Personal Loan Rates
Check Your Personal
Loan Rates
Choose a purpose for your loan
Always free and will not impact your credit score.

Almost Everyone Has a Credit History

Just about everyone in the U.S. has some sort of credit or the ability to obtain credit. Sometimes you have credit and don’t even realize it. This can happen for a variety of reasons, but that’s why it’s so important to monitor and track your credit early on.

After knowing what credit is, the next most important thing to know is where you stand with regard 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. Consumers do this by:

  • Applying for and using a credit card for purchases
  • Keeping a low debt-to-income ratio
  • Making at least minimum payments due
  • Paying debts when they’re due

Learn about personal loans, compare rates, and find the best lenders.

How to Ensure a 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 allow your monthly credit card payments to go over 10% of your income.

Cut Your Expenses

If you already have debt, try to cut your expenses. Anything that isn’t necessary should be cut. Lenders typically base lending decisions on money owed (debt) compared to your income.

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 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.

Watch Your Credit Card Statements

First, make sure you’re receiving them. 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, fraudulent use, and more.

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.

Pros & Cons of Credit

There are ups and downs of using credit to make purchases you don't have the money for.

When Credit Doesn’t Go Our Way

Things don’t always go as planned. Even if you use credit with all the best intentions, life happens.

Sometimes we’re not in a financial situation to do the things we know we should and even making minimum payments sometimes isn’t an option.

Here are some things to consider if you find yourself in this type of situation.

If You Can’t Make Your Payments, Don’t Use Your Credit Cards

If you’re even unable to make your credit card payments, stop using your credit cards.

Take it a step further and remove the cards from your wallet. Leave them at home. The temptation to spend is usually greater when you’re feeling down.

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, and they want to do it in the most efficient way possible.

Creditors will try to work with you, but you must communicate with them.

Worst-case scenario, they’ll know your situation and can set follow-up call schedules with you. This is far less stressful than having them call you during work hours, while you’re trying to wind down in the evenings and on weekends.

Keep Records

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.

Create a Plan

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 will put you in a worse credit position and will impact your loan options when you eventually do need more credit.

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 toward the debt until it’s paid off.

After you declare bankruptcy you could still owe portions of your debt, it will not necessarily leave you with zero debt. Bankruptcy will also stay on your credit report for up to 10 years.

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.