Understanding Credit

I’m graduating relatively soon, and that means I’ll soon have to be “adulting” with the best of them. I do not feel all that well prepared for that, to be honest!


One thing that I’m concerned about is personal finance, particularly the question of credit. I don’t really understand what credit scores are, how they’re determined, who determines them, and who uses them. I know that it’s bad to have low credit or no credit, but I also know that having bad credit isn’t the same as being bankrupt. So what’s the deal, exactly? What is credit, and why do we have it?


“Credit” is a term used when you borrow money. You are “credited” a certain amount when you take out a loan or spend with a credit card (also called spending “on credit”).


There are a lot of companies and organizations that make their living providing credit. Naturally, these companies would like to know which people are the safest to provide loans to. After all, there is a risk in handing out credit: the borrower may not pay you back!


So such creditors and lenders rely on something called a “credit score,” which is what you’re asking about here. That’s often shortened to “credit” as well, as in “I have good credit” or “I have bad credit.”


Your credit score is tracked by three major organizations: Equifax, TransUnion, and Experian. A lot goes into your credit score, and it can be a complicated thing to understand. But you don’t need to understand every dimension of how credit scores work to take care of yours. Solid personal finance decisions will, in almost all cases, result in a decent credit score. Large factors in your credit score include your amount of outstanding debt and how regularly you’ve paid your bills in the past.


And, of course, a bad credit score is not necessarily the end of the world. The used car finance experts at Auto Auction Mall say that there are plenty of lenders and dealers who cater to would-be buyers with bad credit. And getting your finances straightened out and making good decisions going forward can help you repair your credit score. While this can take a while, it’s the only responsible way to repair a bad credit score (beware of those who claim they can make this process easy!).

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