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Good vs. bad credit: Why is this important?

By CreditCards.com

Published: 8 July 2007

 
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There are many misconceptions, and even outright lies, regarding credit, especially about what determines good and bad credit. Currently, television is full of commercials for debt consolidation companies and credit counsellors. Daytime chat shows abound about people who have gone bankrupt due to their credit card use. Many of these stories portray extreme examples, but they still do not answer the questions: What is the difference between good and bad credit? And how does this relate to getting a decent credit card deal?

Good credit
Credit, especially good credit, is very important. It affects major buying decisions. Good credit can help you get a good rate on a credit card, car loan or home mortgage. It can also help when it comes time to rent a home or maybe even get a new job. But how do you get good credit?

Getting good credit
This may sound odd, but to get good credit, you must have credit. This is not as confusing as it seems. Good credit ratings are gained when you borrow money from a financial group, such as a bank or credit card company, and pay it back on time and for the full amount. For example, let’s say you have a credit card from a petrol station that you use only for petrol because you don’t carry a lot of cash around. Each time you fill your tank you use your card. When you do this, you promise to pay the credit card company back. When the monthly payment statement arrives each month, you pay off the amount owed on time. The petrol company that issued your card then reports to a credit reference agency that you have paid, on time and for the right amount. The more good reports that go to the credit agency, the better your credit.

Benefits of good credit
Having a good credit rating means you can borrow more money at better interest rates. Why? Because banks know, based on your credit history, that you are a financially responsible person. The uses of credit reports are expanding. For example, potential employers may look at credit reports while judging job candidates, so good credit may even help you land a new job.

Bad credit
There is nothing good about bad credit. While good credit helps you qualify for car and home mortgage loans, bad credit does the opposite. Bad credit could keep you from being able to buy big-ticket items. It will also keep you from qualifying for credit cards. It could hinder your ability to rent a house or flat. It is very easy to get a poor credit rating: Don't make loan payments on time. There are varying degrees of bad credit. You do not immediately swing from good credit to bad if you miss a payment or are late once or twice. But each late payment hurts your credit. The more payments you miss, the worse it gets.

Fixing bad credit
Credit ratings can be improved. Just as each late payment hurts a little, each on time payment helps. With responsible credit usage and prompt payments, a bad credit rating can turn into a good one over time. The first step is to understand what your credit rating is by looking at your credit reports. These are available through the three credit reference agencies: Experian, Equifax, and Callcredit. Understanding your credit report will help you determine if there are errors. It will also make you aware of what steps you need to take to improve your credit. Credit is a must in our current society. While good credit will help you improve your quality of life, bad credit can hinder your ability to do so. If you have concerns about understanding your specific credit situation, talk to a financial or tax professional to help you take the next step and work toward obtaining -- and keeping -- good credit. For more information on credit cards and related topics, please see our credit card news archive.

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