Why Do You Need Credit?
What is credit and why do you need it?
There is no question that credit has a major impact on your life, your quality of life, your options, business opportunities, and the overall choices that you have in life. Credit provides you access to a better lifestyle.
Credit is also used as a mirror reflection of you! Sometimes it does not reflect the whole story. But your credit report it is evidence for anyone who is interested in how you handle financial obligations. It tells people whether or not you pay bills… and if you pay them when they are due.
It provides lenders a record of your ability and intention to repay. Credit is the report card used which establishes your ability to get a loan from a lender, or get a credit card and your ability to repay a loan in a timely manner. Credit is also used for many other things in life from employers on job application to insurance companies determining how much to charge you for your monthly premium payments.
Credit is a privilege and a convenience. Credit lets you pay for electronics on an installment plan… take out a mortgage loan for a house… finance a car… pay for clothing on a credit card…, or pay for a higher education, etc. Credit allows you to obtain things and make purchases without ready cash.
“Please give it to me now… and I promise I will pay you later” This is the very concept of credit!
You get credit by promising to pay in the future for something you receive in the present. But, there are strings attached to credit. Credit usually costs something… interest… financing fees… and, the original amount borrowed must be paid back.
Make no mistake… no matter how polite and professional the loan managers are… you are being critically judged by your credit report.
Just think about this simple and basic example:
If a co-worker approached you and says please loan me twenty dollars, I’ll pay you back next payday. You are okay with this person, you don’t know them that well, but they’re a co-worker, you know you’re going to see that person nearly everyday, you know when they get paid, and you have it…. so there’s no reason to wonder much about it. So you think to yourself why not, I’ll help them out.
But…. let’s say before you actually tell them yes, and give them the money. Three other co-workers who overheard the conversation come up to you and say… I loan this person twenty dollars last week and they haven’t paid me back. I loan this person twenty dollars 3 weeks ago and I haven’t been paid back. I loaned the person twenty dollars 6 months ago, and I haven’t been paid back…..
So what do you think about loaning this person the twenty dollars now?
This is the exact same thing that happens when a potential creditor is deciding whether or not to loan you money… and then sees a negative credit report. It is the exact same principal. Only you are not a co-worker, or someone they know, and it is usually for a whole lot more money than just twenty dollars.
Most Americans lives are some how, some way dependant on credit on a daily basis. Unless you are one of those people who paid cash for your car, paid the entire sale price for your home in cash, purchase a house full of furniture for your place in cash, paid your entire years rent upfront in cash, pay your auto insurance premium for the entire year. Even the electric, gas, water and phone payments are a form of credit because you use those utilities services before actually paying for them.
Credit is prevalent in all our lives. So the answer to the question: “Why do you need it?” is, “You all ready have it in some ways, whether you realize it or not”
And you need some form of it… just to survive. Therefore it is vital that we maintain good credit if we want our lives to run smoothly. While it is possible to live with no credit or even bad credit, it severely limits your options in today’s society. It limits your opportunities to move up in life!
But it is just not the areas of finance or deciding whether, or not, to give you a loan.
More and more you may find your credit report used as part of an employment application. The law allows potential employers to examine your credit report as part of your employment interview process, or they can just simply ask for your permission to pull your credit as part of their application process. They use the information provided in your credit report as part of their evaluation of you. Credit reports are being used by more and more companies to check out potential employees.
As stated before you are being judged by your credit report. Many employers feel that the person with the bad credit report is the same person most likely to be an unproductive worker, miss excessive time from work, engage in acts of employee dishonesty, etc. etc.
In addition to this… more and more the insurance industry are using credit reports to decide whether or not to issue a policy, or to charge higher premiums! They have actuaries and statistics which they say clearly shows that the person with the bad credit is more likely to file more claims, get in more accidents, and engage in acts of insurance fraud.
There are no laws, no where, that prohibits differential treatment based on credit. It is legal to discriminate against people because of their credit.
These are just some of the reasons, why you need credit. And why you need good credit.
Next we will talk briefly about the types of credit.