The Basics of Building Credit

What is credit?

The dictionary defines credit as “confidence in a purchaser’s ability and intention to pay, displayed by entrusting the buyer with goods or services without immediate payment.” But what does that really mean?

Simply put, credit is a measure of how likely you are to pay something back. When you buy a car without paying for all of it at once, your credit tells the bank if you can be trusted with a loan.

Good Credit = Easy to Trust

Bad Credit = Hard to Trust

Just about every purchase you will make as an adult will involve your credit in some way. You need credit to buy a car, rent a house, get a loan, apply for a credit card, and do anything along those lines. The sooner you start building your credit, the better off you will be.

Think about it...

Lady buying a car Pretend for a second that you are a car salesman, and a customer wants to buy a brand new car on the lot. She does not have the cash for the car, but she says she can afford to make monthly payments for five years. As the dealer, you now have to decide if you can trust this person with your vehicle, or if you will lose money doing this.

How are you going to see that the buyer has the money? Are you going to look at her pay stubs? Her bank statements? Her handwritten promise? Her Facebook profile?

The only way to really know if this is a good idea is to look at her past. Has she made payments on anything else before? Does she owe money to a lot of other people? These answers are all part of her credit.

By looking at the buyer’s credit, you can see if she is “worth” selling the car to.