What Are the Advantages of Credit? Save Money and Time Now
You often hear the problems with credit, but what about the advantages of credit? So many financial gurus often tell their audience to avoid plastic swipers. Yet, you could be missing out on so many perks if you do that! Credit isn’t purely bad as it has a lot of benefits often ignored by so many people.
Having access to credit lets you spend on stuff even if you forgot to bring cash. You may not have known this, but it could also help you land a job! If you use credit too much, though, you might end up with bad credit. This does the opposite as it makes it harder for you to get the best lines of credit and the best employment opportunities.
What exactly is credit, and how do you even know whether you have a “good one or a bad one?” We will answer these questions first, along with how banks and insurance companies measure your credit. Then, we will talk more about what you’ll experience if you have a good or bad credit rating. More importantly, we’ll teach you how to boost those numbers!
What Is Credit, and How Is It Measured?
Whenever you get something now and pay for it later, you get credit. It’s also known as deferred payment or, more commonly as debt. You often get more of it as you swipe your credit card.
Then, your credit card issuer records all your transactions and sends them to a credit bureau, and that institution compiles all that information into what’s called a credit report.
It details your credit history and assigns a number from 300 to 850, known as a credit rating. This is often measured using a FICO score which is made up of the following criteria:
- Payment history (35%) – This shows the balances you’ve accrued and what time you’ve paid each one. You get poorer marks as you make more late payments.
- Credit utilization (30%) – This is the ratio between the total of your unpaid balances and your credit limit. You must keep this lower than 30% to keep a good credit score.
- Credit history length (15%) – This one measures how long you’ve had your credit accounts. What’s more, it considers how long they have been active and how long it’s been since you’ve used them. It’s best to keep accounts that you aren’t using, as removing them may lower your score in the future.
- Credit mix (10%) – This refers to the kinds of credit you currently have. It’s best to have a mix because it shows lenders that you can handle multiple types of credit. However, you won’t take advantage of credit scores if you owe too much!
- New credit (10%) – Your bank performs a hard inquiry each time you open a new credit account. That brings down this segment of your credit score because it may show that you can’t manage your finances properly.
Read More: Should I Get a Credit Card: Things You Should Know
What Is an Insurance Score?
Insurance companies use a scoring system similar to the FICO model, and it just changes the weight for each criterion. Here’s the breakdown of those factors:
- Payment history (40%) – This is similar to FICO ratings, except it’s a much bigger factor for insurance.
- Outstanding debt (30%) – This considers the amount you currently owe.
- Credit history length (15%) – This works similarly in insurance scores and credit scores.
- The pursuit of new credit (10%) – This is similar to the “new credit” factor for credit ratings.
- Credit mix (5%) – This also counts the types of credit you have, such as auto loans.
Note that not all states allow the use of this insurance credit system. Check with your state insurance department to see what the law requires.
Make sure you check this first the next time you apply for car insurance. Learning more about this credit scoring model lets you take advantage of credit!
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Read More: What You Need to Know About Credit Card Debt
What Are the Benefits of Good Credit?
You should take advantage of credit by keeping your score as high as possible. Here are the following reasons why you should do so:
- Convenience – It’s a lot easier to bring credit cards instead of a wallet full of cash, and you don’t have to take note of how much you’re paying and the change you should receive.
- Emergencies – As we said, credit lets you spend for urgent situations. If you get caught without the right amount of cash on hand, credit lets you cover the issue immediately.
- Better service – Rewards credit cards maximize the benefits you get from each transaction. What’s more, you might be able to get an item cheaper.
- Employment opportunities – Believe it or not, employers check your credit score when you apply. Take advantage of credit by getting a good rating. A good credit score shows them that you’re responsible for your finances, so you’re likely to be reliable at work.
- Build credit – Here’s the most important reason why you need credit. Pay your deferred payments on time, and you’ll eventually earn a good rating. This allows you to get the best terms and conditions for deferred payments. For example, you get the best interest rates for financial products and consumer items like cell phones.
DebtCarePlus
You May Also Like: 4 Best Starter Credit Cards
How Do I Improve My Credit?
If you don’t take advantage of credit ratings, you miss out on all these amazing benefits. But how do you boost your credit rating? Let’s look at some examples below:
- Eliminate debt – A low credit score is often due to high debt. To manage it more efficiently, consider using debt management methods like a balance transfer credit card or consolidating your debt with a personal loan. Both options can combine your debts into one with a lower interest rate, making monthly payments more manageable. Other strategies, such as debt settlement, credit counseling, debt forgiveness, and even bankruptcy, may also help in tackling overwhelming debt.
- Secured credit cards – A secured credit card requires a refundable security deposit, acting as collateral, but functions just like a regular credit card. Use it to make purchases and ensure timely payments to steadily improve your credit score. Unlike unsecured loans, which don’t require collateral, secured credit cards offer a safer way to build credit, making them an effective tool for those looking to strengthen their creditworthiness.
- Credit builder loans – Similar to secured credit cards, this lets you build a record of on-time payments to improve your credit score.
- Do-it-yourself methods – You may pay off all your balances with the debt. Approaches like the snowball method can aid in paying off smaller debts first while avalanche method tackles the big one.
800Financial
Check if you qualify in two simple steps
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Final Thoughts
Of course, you shouldn’t dismiss the wisdom of the “grumpy” financial advisors. They know that people often go overboard with their credit use, and that’s why they are against relying on credit.
Taking advantage of credit means using it to improve personal finance. Once you get a good score, use it to save money. You may place it in a bank account or set some aside at home.
A debit card lets you access the money even though it’s in the bank. Still, it’s a good idea to have some handy. Nevertheless, make sure to spend wisely!
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Frequently Asked Questions
How does having a credit card help in building a credit history?
Having a credit card allows individuals to establish a credit history by making regular payments and maintaining a good credit utilization ratio. Lenders and creditors often consider an individual’s credit history when determining creditworthiness for future loans or financial opportunities.
How does credit help in emergency situations?
Credit can be a valuable resource during emergencies. It provides a financial safety net when unexpected expenses arise, allowing individuals to address urgent needs promptly without depleting their savings. This can help maintain financial stability and prevent significant disruptions.
How does credit contribute to establishing financial independence?
Answer: Credit plays a vital role in establishing financial independence. By responsibly managing credit, individuals can build a solid credit history, which is often required for significant financial milestones such as renting an apartment, purchasing a car, or owning a home. It empowers individuals to make important financial decisions and achieve their personal and professional goals.
Published on October 19, 2021; Updated on October 31, 2024.
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