Understanding credit

Start understanding your credit now - you'll be thankful later. You have the power to control and change it and that can go a long way towards bringing you financial freedom.

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Credit is an agreement with a lender that allows you to do transactions immediately on the promise to repay the lender the amount borrowed plus interest at a future date. Home equity loans, car loans and credit cards are just a few examples. When you're ready to buy a home, buy a car or get a credit card, the lender will look at your credit history to determine your ability to pay back the loan.

A credit score is an objective numerical value that summarizes the detailed information in your credit report. Different aspects of your credit report carry different numerical weights, and a mathematical formula or computation determines your score.  Learn more about Credit Reports and Scores.

Chances are you've heard people talk about good credit, bad credit and no credit. Good credit means you pay what you owe on time and lenders feel confident about lending you money. Bad credit means you have a history of not paying bills on time and letting debts build up. This makes it harder to qualify for loans or to get low interest rates. No credit just means you haven't obtained a credit card or borrowed money from a lender-so there's no record of your ability to repay the money on time.

Establishing good credit tells others that you are financially trustworthy. When you use a credit card to make a purchase, you enjoy the safety of not having to carry a lot of cash. You have the peace of mind that comes with having a financial security blanket for emergency needs and you're protected against financial loss if your card is lost or stolen. If you lose cash, it's almost never recovered. Learn how to protect your credit at Security Tips.

It all boils down to paying your bills consistently and on time. Always pay at least the minimum amount due and always pay on time. Learn more about building good credit at Managing credit.