Now that you’re familiar with what credit is, how credit reports are created, and where credit scores come from, you might wonder: why do I even need credit? Can’t you just pay cash for everything from now on and forget all this?
The truth is yes, you can use cash to pay for everything and avoid or ignore credit if you wish. However, credit is required for many things, so it is important to understand why you should have it in some form.
Here are 6 Major Reasons Why You Need Credit:
- Access. When you use credit cards responsibly, you have access to perks like extended warranties, price protection, and travel upgrades on purchases you make with your credit card. When used within the boundaries of your budget and credit limit, you can spread out the payments on a big-ticket item over time. Credit grants you access that you just can’t get with cash.
- College. In 2016, the average US household had almost $50,000 in student loans. A clean credit report and a high credit score mean that you’ll be paying the lowest interest rate possible on those loans if they are from a private lender. Students or graduates with federal loans may have an opportunity to refinance to receive a lower interest rate when credit is strong.
- Homebuying. Could you buy a house with cash? Sure! Could you do it anytime soon? Probably not. The best mortgage rates are reserved for borrowers with the best credit scores. Anything under 600 – which is considered poor credit – will make home financing very difficult, if not impossible.
- Employment. Employers can’t see your credit score, but they can check out your credit report. A report full of black marks could be a red flag and cost you a job opportunity.
- Insurance. When you shop for car insurance, and in some cases, homeowner’s and renter’s insurance, the insurance company may check your credit score. The best rates go to the customers with the highest scores.
- Safety. Of course, you can use your debit card to shop online and in stores – but what happens if you lose it? Or if there’s another data breach or some form of identity theft with your card details? If your bank account information becomes compromised, you could lose everything. Credit cards often have greater protections against these types of issues. Getting a credit card requires fair to strong credit.
If you want to travel, go to college, buy a home, get a job, and insure all the parts of your life then you probably need credit. Unless your family is already rich, of course. Having good credit isn’t just about having a bunch of cards with available money to spend. It’s about making on-time and in-full payments, paying down your debt, and keeping your record clean.
Your credit report is a signal to creditors that you are a manageable financial risk to take on. A high credit score and a clean report tell them that you pay your bills, you are more likely to be a reliable employee, and you’re less likely to file a ton of insurance claims. If you avoid credit you’re telling them nothing. They won’t know that you’re all those things and deserve a fair shot.
How do you build credit?
If you’re building credit from scratch, consider getting a secured credit card, or a co-signed loan or unsecured credit card. These accounts set the stage for creating a payment history which makes up a significant portion of your credit score calculation.
Once you have credit in place, be sure to make payments on time and be careful with how much you are spending on credit each month.
Repairing the damages on a credit report to raise your creditworthiness is hard work – but you can absolutely change your history. Understanding the terminology, contacting the lenders, negotiating rates and payments, adjusting your lifestyle, and knowing when it’s the right time to contract a professional are all parts of a debt-repayment and credit-building strategy.
Will it be easy? Just like anything else worth working for, it will be challenging. But after a while, your on-time and in-full payments will have a positive effect on your credit report and your score will go up.
