Understanding Credit


It would be difficult to imagine how the modern world could operate without the sophisticated facilities for borrowing and lending money that most people take for granted. Businesses, investors, and ordinary families depend on credit arrangements in the form of loans and credit cards for their day-to-day operations, and banks and other financial institutions make the lending of money their primary reason for existing. Credit is a powerful force in any country’s economy, and it can be a supportive and beneficial means to financial security, provided it is not abused.

Previous generations often viewed credit with suspicion, and most people avoided it if they could. No one wanted to find themselves in a position where they were unable to repay their debts, and perhaps end up in debtors’ prison. Attitudes have changed, however, and in today’s world, credit is seen as a mutual arrangement where funds are provided by lenders at a reasonable interest rate, and repaid over an appropriate period of time. Lending and borrowing, like buying and selling, are the basis of a simple business transaction like any other.

Because problems can easily occur where money is concerned, a system of credit rating has been devised to enable lenders to make intelligent decisions about who should or should not be allowed credit. Detailed records are kept on file showing the credit history of individuals who have obtained loans or used credit cards, and how well they have honored their repayment schedules. A numerical score is assigned, based upon a person’s repayment history and whether or not payments are made on time. This score, or credit rating, is available to lenders, mortgage brokers, and anyone else who has been asked to provide goods or services.

Consumers and borrowers should not take their credit rating lightly. A person’s credit score will influence all future financial transactions that involve borrowing money and receiving goods or services, and a bad credit record can seriously limit the possibilities. Most people want to negotiate a mortgage or apply for a bank loan at one time or another, but a bad credit rating can prevent them from doing so.

Many people consider a good credit rating to be so important that they take positive steps to establish a good record. This can be done by taking out a small loan, and then repaying it fully in a relatively short time. Alternatively, making regular payments on credit card purchases, preferably paying more than the minimum amount, can establish a good record. The very fact of repaying a loan is sufficient to record a good credit score that is then available to anyone who needs it.

It is important for potential borrowers to be aware of their own credit rating. This can be found through a number of internet sites, and although a small fee may be charged, the knowledge that one has a good credit rating is well worth the cost. Also, if errors are found in the records, they can be corrected quite easily, especially if one can produce documentation to prove the most recent information. Credit is a useful component of a person’s financial situation. If it is used wisely, it can be a substantial benefit to one’s overall financial health.

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