Maybe you've heard the term "bad credit" in commercials that say you can get your checks cashed or your debts consolidated.
The reason those services are advertised is simple: If you have bad credit, it's difficult to get good rates on loans, credit cards or even checking accounts. So you'll end up paying a lot more over time for things like cars, houses and other things you buy on credit.
With bad credit, you may not even be able to get any of those services (which really means you can't lease a car or buy a house, and maybe not even get a cell phone). In fact, employers look at credit scores as well. They might think that someone who is irresponsible with money isn't responsible at work.
If you want to avoid bad credit, you need to understand how credit, credit reports and credit scores work.
Credit is a privilege given to you by a bank, lender or credit card company.
- A history of your credit predicts how well you'll pay off debts in the future.
- Your credit is shared with lenders, employers and others through credit scores and credit reports.
Your credit report is a record of how well you manage credit.
- Your credit report is based on:
- How many of your bills are paid on time.
- How much credit you've had.
- How long you've had credit.
- Reports are kept by four national credit reporting agencies.
A credit score is a number given to you based on your credit report.
- Good credit means a higher score.
- A high score means lower interest rates and better terms.
- Your score changes as information in credit report changes.