About Credit

Many times either on television or on the radio you will hear promotions about getting credit, using credit or applying for credit. If you are not familiar with credit and what you can do with it here is a summary of credit that should help you appreciate what credit actually is.

A Definition of Credit

The purpose of credit is to enable you to buy something that you either prefer not to pay for with cash or do not have sufficient cash to buy outright. The person or organisation that extends you credit (called a creditor) then charges you interest on top of the credit (loan) amount and/or other fees.

The type of credit available to consumers is either unsecured or secured.

Secured credit is where a creditor lends you money to buy a particular item and they use that item or another as collateral. The best example of a secured loan scenario is the purchase a property. The majority of people do not have enough money saved to purchase a home for cash so they apply for credit with a lending institution. When people are given credit for a property purchase, a lien is attached onto the property, which means two things. One, you cannot sell the house without repaying the balance on the loan, and two if you default (do not make your payments) the creditor will repossess your property and sell it to recover the balance of the credit they loaned you.

Conversely, unsecured credit is typically a loan or line of credit that you have when you posess a credit card. The lending institution that issues a credit card runs a credit history on you. They then determine how you pay your outstanding bills and how much total credit you have available to you to decide how much credit to extend to you. Since this type of credit is given with no collateral it is harder to get.

As soon as you acquire credit you start to acquire a history of credit that can be used to asses your credit worthiness. If you pay your bills on time, all the time and you don't use more than half of your credit limit on your credit you will get a great credit rating. As soon as you acquire a good credit rating you will see potential improvements in many other areas in your life. For example, many employess are now credit checked by employers as a part of the recruiting process; employers may equate good personal financial managament skills to the idea that an employee is not a "risk". People with a good credit history are also more likely to receive better rates of interest and better conditions when applying for further credit or loans.

One thing that you should know is once you establish credit you need to maintain it.

It is very easy to ruin your credit status. Just watch your credit rating drop if you make late payments, particularly if your payments are late by over a month. Your credit rating can take literally years to repair if it becomes tarnished and it can also have unforseen negative affects. An example of such an affect can be a car insurance company running a credit check against you when your insurance requires renewing. If the insurer sees that you are beginning to pay bills later than required they may increase your insurance rate and request a large up-front payment from you.

For many people, having access to credit nowadays is almost as vital as the air they breathe. Therefore, it is also vital to have a good understanding of credit and how to keep your credit rating "good" so that you can reap the benefits.

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About the Article Author

Javier Melendez is a writer for several finance web sites such as the No-CreditCheck-Loan website. His recent work concerns consolidating credit cards research.

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