Credit is the ability to borrow money that you promise to repay with interest. Credit is an important part of your financial life because it allows you to do the following:
Make a large purchase and pay for it over time. If you don’t have enough money saved up to buy a car, having credit allows you to get a loan and repay it over a set period of time.
Stay safe in an emergency situation. If your car breaks down and you don’t have enough to pay for the repair, having a credit card or line of credit allows you to get back on the road and repay the balance over time.
Avoid having to carry cash or paper checks. When you’re making a large purchase, like a computer or furniture, using a credit card is safer than carrying around a large amount of cash or paper checks that could be stolen.
Make online purchases and reservations. When you need to buy something over the Internet—
If you don’t have credit, the only way to get a loan or credit card is to have someone with good credit cosign an account. A cosigner might be a family member or friend who guarantees to take full responsibility for the debt if you don’t repay it.
How do you become creditworthy so a potential creditor—
Credit score: How likely are you to make on-
Income: Do you have a steady job and have enough income to repay a debt?
Debt: Do you have existing debts? If so, will you have enough money to pay your current debt and make payments on a new debt?
Financial ratios: How much debt do you have relative to your income?
Collateral: Will you secure a debt by pledging property (like a car or home) that a lender could sell if you don’t make payments?