Learning how to get, keep, and protect good credit is critical in a credit-driven world.[cite::219::cite] This short primer will give you the basics of building, maintaining, and safeguarding this invaluable funding tool.
What Is Credit?
“Credit” is a contract or agreement you make with a lender to borrow money to purchase something now and pay it back later, over time, with interest added.
Credit cards, mortgages, loans, lines of credit, and even utilities like cell phones, gas, and electricity all can be forms of credit. When you buy something “on credit,” it’s “post-paid,” meaning you use it first and pay for it later. The money you owe to your creditors is debt.
What Makes Having Good Credit Essential?
Credit, especially “good credit,” allows you to get goods and services without having to pay in advance, using affordable financing and repaying the debt over time. Credit also helps you get services often difficult to obtain without sometimes significant cash outlays, like car rentals and hotel rooms. However, your credit score can also be the basis for gaining access to many opportunities, such as jobs, housing, utilities, and other financial products like insurance and more. Without strong credit, life becomes more challenging and expensive, so it’s essential to keep your credit good.
How Is Creditworthiness Determined?
Your “creditworthiness” based on credit history, which shows the status of current credit accounts and how you’ve handled them in the past. Potential creditors get your credit history from your credit reports, a record of your payment history compiled by creditors and used to determine how reliable you’ll likely be in repaying debt. References from others who’ve extended you credit, like landlords, count too.
The more creditworthy you are, the better your credit is, and the higher your credit score will be. Your credit score is a three-digit number, usually between 300-850, and most commonly provided by FICO, that's calculated using your credit reports. It shows creditors at a glance if you’re a safe credit risk for them compared to other borrowers. The higher your credit score is, the easier it is to get low-cost financing and access additional resources.
Protecting Your Credit
Thieves want access to your identity data to get credit illegally, and they don’t care about ruining yours in the process. Use these essential methods to protect yourself from identity theft:
- Put a freeze on your credit reports, giving only you access, check them annually for mistakes and fraud, and dispute any errors you see.
- Keep your social security card, checkbooks, credit cards, and other financial documents locked away safely at home.
- Stay safe online by creating strong, unique passwords for all websites, and apps.
- Make sure you’re logging in only on encrypted sites.
- Keep all devices secure with distinct passwords, regularly updated security and other software, and secure WiFi.
- Consider credit and identity theft monitoring services that alert you when your identity or financial data gets used or compromised.
- Review all bills and statements carefully to detect fraud early, dispute errors all, and shred them when you discard them.
Credit Score Do's and Don’ts
To keep your credit score healthy, do pay bills on time, and review and correct credit reports annually. Do keep credit utilization low by only using what credit you need, and do pay down loan debt. Do only add new credit you need it, but shop around for the best possible rates. Do negotiate with creditors if you’re having trouble paying.
It takes time to fix credit, so avoid damaging yours. Don't miss your monthly payments. Don’t max out credit cards or keep opening new credit accounts. Don’t close unused credit accounts. Don’t allow bills to go into collections. Don’t skip identity theft protection strategies.
Follow all these strategies to gain good credit and keep it protected. These key skills and habits are a crucial part of keeping your personal finances strong, sound, and improving over time, so don't take your credit lightly.