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Some Words About Credit
By: Javier Melendez

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Many times either on television or on the radio you will hear promotions about getting credit, using credit or applying for credit. This article is designed to help you to understand credit, what it can do for you and how it can impact your life in positive and negative ways.

What Credit Is

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 creditor in return for extending you credit earns money by charging you interest, application fees or a whole assortment of other fees.

There are two types of credit available, secured credit and unsecured credit.

In a secured credit arrangement, a creditor lends you money but that money is secured against an item that is used as collateral. The best example of a secured loan scenario is the purchase a property. Most people do not posess the amount of savings required to purchase a property outright and so they have to apply for credit. 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 creditor issuing your credit card in this instance will run a credit check against 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.

Once you have credit you begin to establish a credit history. If you pay your bills and financial commitments promptly and do not spend more than 50% of your credit limit, you will begin to achieve a good 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 employers now want to run a credit report on you before you are hired; they feel if you do not handle your credit properly then you may be an employment 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.

Something that is very important to remember however is that once you have a good credit rating it is vital to keep it.

It is very easy to ruin your credit status. Make a few late payments, especially over 30 days late and see how your credit rating plummets. Once you ruin your credit it takes years to repair it and will have unforeseen consequences. A good example of this is if your car insurance is up for renewal and your insurance company runs your credit report and sees that you are starting to pay your bills late. In this instance you may be required to put a larger down payment up and your rates might increase.

Having credit in this day and age is imperative. Understanding it is crucial, and maintaining it is necessary to help you with raising your credit history and reaping the benefits of having good credit.

Article Source: http://www.depositarticles.com

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

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