Understanding Credit

Credit involves borrowing money with the agreement to pay it back at a future date. Home loans, car loans and credit cards are just a few examples. When you’re ready to buy a home, buy a car or get a credit card the lender will look at your credit history to determine your ability to pay back the loan.

Chances are you’ve heard people talk about good credit, bad credit and no credit. Good credit means you pay what you owe on time and lenders feel confident about lending you money. Bad credit means you have a history of not paying bills on time and letting debts build up. This makes it harder to qualify for loans or to get low interest rates. No credit just means you haven’t obtained a credit card or borrowed money from a lender—so there’s no record of your ability to repay the money on time.

Establishing good credit tells others that you are financially trustworthy. When you use a credit card to make a purchase you enjoy the safety of not having to carry a lot of cash. You have the peace of mind that comes with having a financial security blanket for emergency needs and you’re protected against financial loss if your card is lost or stolen.

It’s easy to build credit - the trick is to build good credit. Here are some quick tips to help you:

• Pay all your bills on time such as rent, telephone, utilities etc.
• Open a current or savings account
• Apply for a credit card or a loan with the lowest possible interest rate
• Keep your credit card balances to a minimum and avoid missing payments

Your credit score is calculated using a number of factors and is primarily based on the way you have managed your borrowing in the past. Although, it is important to note that other factors will also be taken into account when a responsible lender receives a credit application. For example a potential customer needs to demonstrate an ability to comfortably pay the debt back, therefore earnings, age, borrowings and so on are all taken into account.