What is credit and how will it affect me heading forwards?

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If you’re a beginner in the world of money management, all of the different terms used can be a bit overwhelming. “Credit” is particularly prevalent, and although you may have heard the term before, many people are unaware of the significance of it.

Credit is an agreement between two parties, allowing one to receive goods, services or money in advance with the promise for the debt to be repaid over time. Essentially, if you were to take out a loan with a bank, there’s an understanding that the amount would need to be repaid, including any interest accrued over that time.

It’s crucial to ensure that you fully understand the terms of any credit agreements before you apply. If you were to get rejected or take on too many credit agreements in a short period of time, it could have a serious impact on your financial future. Keep reading to find out how credit can affect you going forwards and what you can do to make smart choices now.

What is a credit score?

A credit score is a number that rates your reliability to uphold credit agreements and make payments on time. The numbers themselves will vary depending on the provider used to obtain the rating and the country, as they are not internationally consistent. The most important part is how your number relates to the national average.

How does my credit score affect me?

If your score is below average, credit score providers will usually offer insights into how you could improve. Things such as registering to vote, holding a bank account for a long period of time and regularly paying off a credit card can be extremely helpful towards increasing your score.

Although the score might seem a bit arbitrary if you’re a young person, it will be incredibly important when you come to enter rental agreements, apply for a student loan or buy a home. Mortgage providers put a lot of weight on your score when they make their decision on whether or not to offer, so it’s worth putting the work in now to get your credit score as high as possible.

How can I use credit in a positive way?

Credit can be scary, but it can also be an incredibly useful tool – not only to increase your credit score in the future, but to help manage your day-to-day finances too. Taking out a credit card at a young age is a great way to begin your financial journey. Although there won’t be many options available, any card that has a high acceptance rate is a good starting point.

The key is to make at least one substantial purchase using the card each month, and ensure it’s paid off in full by the end of the month. This way, you’re demonstrating to credit providers that you’re reliable and can make payments on time, gradually building your credit rating and opening up a whole new range of credit options in the future.

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