Why is Credit Important for Individuals?
Credit helps individuals purchase things they need now but would otherwise be unable to afford. Building a good credit score also allows individuals to take out a car loan, secure a job, and get a mortgage with more favourable terms. When used correctly, credit allows individuals to make large purchases with the promise to pay later. For example, items such as cars and houses are too expensive for many people to pay for all at once. Credit allows them to pay over a period of time while accessing the product immediately.
Credit is also extremely helpful in an emergency by providing immediate access to cash without having to pay until a later date. However, when misused, credit can negatively impact major financial applications such as auto loans or mortgage applications.
What Does Credit Allow Individuals to Accomplish?
Building a good credit score demonstrates your history of paying debts on time and indicates your level of financial reliability (learn more about how to build a better credit score here). Good credit can be used to secure larger loans with lower interest rates and more favourable payment terms. For example, before purchasing a house, mortgage lenders will look at your credit score to ensure you won’t default on your mortgage. Credit is also useful for entrepreneurs hoping to start their own business who require a small business loan.
Sometimes, employers will also conduct credit checks as part of the hiring process or to give a promotion. For example, the employer could determine your debt level to be too high for the salary that will be offered. Furthermore, electric companies sometimes require credit checks to establish utility services.
What Are the Consequences of Bad Credit?
Bad credit indicates that you struggle to pay your bills on time or may not have paid the full minimum payments (learn more about how to avoid a bad credit score in our “How to Build and Improve Your Credit Score” blog post). As a result, companies will be more reluctant to do business with you. For example, you may struggle to rent a house, you could pay a lot of interest on your loans, or you may struggle to secure a job.
When used correctly, credit is a powerful tool to building wealth and reaching financial independence. It provides access to a variety of loans and tools with more favourable terms and allows consumers to purchase products they couldn’t otherwise afford. However, it’s important to educate yourself on how to build good credit in order to avoid the consequences of misusing it.
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