What Is Credit?

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:

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—such as a bank or credit card company—will allow you to borrow money? While each institution has different guidelines for evaluating a potential borrower, the following five criteria are generally used:

  1. Credit score: How likely are you to make on-time payments based on your credit history? In this section you’ll learn more about what a credit score is.

  2. Income: Do you have a steady job and have enough income to repay a debt?

  3. 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?

  4. Financial ratios: How much debt do you have relative to your income?

  5. 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?