What Is Credit?

Credit is something that affects each and every one of us but how many of us actually know what  it is and how it works? Before embarking on a journey to a good score it helps to understand how credit actually works and what it tells banks about your financial history.

What is credit?

Credit is essentially money given to you by a bank or lender with the promise that you will pay them back in the future. In order to secure credit from a bank or creditor you have to show that you are trustworthy enough to pay it back on time with agreed upon interest, which is where your credit score comes in.

Credit usually exists in the form of revolving credit (most credit cards), installment credit (mortgages, car loans, student loans), and service credit (phone contracts, memberships etc.). All of these kinds impact your credit score in different ways based on how much you owe, if you pay them on-time and how many open accounts you have.

In addition to the kinds of credit available they are also broken down to secured and unsecured credit. Secured means that the credit is backed up by an asset like a car or home while unsecured credit is just about everything else.

Why do I need good credit?

Good credit is essential if you want to buy a home, car or other large item. Since the vast majority of people cannot buy something that expensive outright we rely on loans and mortgages to make those necessary purchases. Sometimes credit history goes beyond simply taking out a loan or opening a credit card - it may be looked at when getting a job or renting a home or apartment. 

Having good credit means you are low risk to creditors. Put it this way, if a friend or family member asked to borrow money you would probably not give it to them if they had a history of making reckless purchases and not paying it back. Since creditors don't actually know you personally they use your credit score to access how much of a risk lending to you is. The lower the score the higher the risk for them.

Since your credit score is an amalgamation of your financial history it's an easy way for banks and lender to access your reliability, though it's not always fair to you if you've lost your job, had large medical bills or were not as financially secure in the past.

Bad credit is not forever

Having a low score now does not mean you will be stuck with it forever! If you are serious about getting your credit in shape give us a call at 617-299-8799 to set up a consultation. We will work with you to create a personalized plan to restructure your credit and boost your score.

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