What is “Credit”?

When you get a loan from the bank, or apply for a credit card, what you are really doing is asking the bank to extend you credit. This means that you are making a promise to the bank that you will pay back the money that they are lending you. The bank agrees to lend you the money based on your declared intention to repay, your trustworthiness as a borrower, and your financial ability to repay. If your trustworthiness is in good standing, and you have demonstrated an ability to repay loans in the past, that is the real meaning of having “good credit.”

Being able to use the system of credit responsibly is a big part of developing your own financial independence and maturity. It requires an ability to accurately assess what you are able to pay within your means, and also a commitment to being true to your word. As you develop a credit history, your credit score will improve and you will have a more favorable credit rating with banks and credit card companies. A good credit rating means lower interest rates and better terms on loans, and a higher approval rating for mortgages, auto loans, and other forms of consumer credit.

In today’s world, credit is used for many large scale purchases such as homes, automobiles, educational expenses, or home improvements. You can also pay for ongoing services with credit. For example, when you purchase cable or telephone services, the cable and telephone companies are extending their services to you in advance, so essentially, you are paying for those services on credit.

Having “good credit” determines whether or not you qualify for a loan, and at what rate of interest you can borrow. A good credit score means you get better rates, higher credit limits, and other benefits. It’s important to know your credit rating if you plan to apply for a home loan, car loan, or any other form of credit.