Why We Need Credit

Some say credit is the root of all evil. Others contend that we can live without credit, and if we did, we’d be better off. I won’t name any names, but the bottom line is that we are a society built on credit, and if you’re not a multi-millionaire, there’s a good chance you’ll need some form of credit at some point in your lifetime.

Heck, even billionaires rely on credit to manage their money.

To Establish Credit History

While I’m not here to praise the use of credit, I do want to highlight the need for credit in today’s society. Aside from credit being a useful means of leveraging assets, it is also necessary to use credit early on to establish a history of trust with prospective banks and lenders. It‘s a necessary evil.

When it comes time to borrow for a mortgage or any other very expensive item, you’ll only be granted financing if you have a solid credit history.

Even if you’ve got $300,000 in cash reserves, a great job, and you’re putting $500,000 down on a new home, you’ll still need a good credit score to complement the above in order to receive favorable financing terms on a mortgage. And let’s face it, how many consumers fit the above description? Not very many.

So make sure you establish a solid credit history early on and do what it takes to maintain a favorable credit score. You should have at least three active tradelines with a 24-month history on each at all times. Acceptable tradelines include auto loans, student loans, mortgages, credit cards, and more, so it shouldn’t be very difficult to meet or exceed this requirement.

If you’re curious where you stand, check out the average credit score in the United States and my credit score range.

And periodically check your credit report by ordering a free credit report from Annualcreditreport.com. Do note that it will not contain a free credit score, but you can use these free credit reports to ensure nothing negative or reporting in error is outstanding.

The good news is you can actually get a free credit report without a credit card, which is a rarity these days.

If any late payments or negative items do show up, make sure you get them removed from your credit report immediately. And always keep your credit card debts low to ensure you credit score doesn’t suffer as a result.

Credit Can Supplement Income

Credit can also come in handy if you need money at certain times of the year when income isn’t flowing as much as you would like.  For example, if your income is more seasonal, you may need a line of credit just to get by. Or if you need to make a large purchase and don’t have the cash on hand.

Fortunately, there are plenty of 0% APR credit cards available that allow cardholders to carry a balance for 12 months or longer without paying any finance charges. So you can make the purchases you need to make without paying a dime in interest, so long as you pay back the debt before the promotional APR ends.

Businesses also use credit to buy many of the goods they need to run their daily operations.  And even those who have plenty of money use things like charge cards to make purchases, one because it’s safer and more convenient than using cash, and also because you can earn rewards.

Credit Isn’t an Invitation to Spend

When it comes down to it, you should know when to say when. If you can’t afford something, simply don’t charge it. After all, damaging your credit score will cost you much more than any purchase you felt you couldn’t live without.

The need for credit shouldn’t be perceived as an invitation to spend. Credit is a privilege, and should be handled responsibly to ensure you obtain the best possible financing terms when the time comes to make large purchases, such as a mortgage.

Remember, without established credit, it is very difficult, if not impossible, to obtain a mortgage, auto loan, or even a cell phone.

So be sure to get on the path to good credit early on – doing so could save you thousands upon thousands of dollars over your lifetime.

Tip: How to get a credit card.

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