You have probably heard credit referred to as good or bad and wondered why. First, you need credit (a credit file) to have good or bad credit. Credit is the ability to borrow money today and repay it later, most likely with interest. Credit is based on trust. Lenders loan money on credit to trustworthy borrowers via credit cards, auto loans, home mortgages, student loans, etc. When borrowers make on-time payments for goods and services purchased on credit, they create good credit. Not paying or making late payments creates bad credit.
Credit is graded, which is called a credit score. Good credit has higher scores than bad credit. Your credit scores are derived from the history of your credit usage. The history of your credit usage is called a credit report. Therefore, good and bad credit consist of credit history and credit scores.
Good credit is essential, especially if you want to rent or buy your own place. To rent or buy a home, you must first apply. Landlords and mortgage lenders can reject your application based on your credit history and scores. In addition, having good credit, compared to bad credit, saves you money via better interest rates.
Having and keeping good credit can be challenging. What if you lose your job or recertification for your benefits has been delayed for months, and you cannot pay your credit card bills? Suddenly, like many unforeseeable circumstances, your once-good credit is now bad. Do not get discouraged; there are ways to improve your credit.