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. But the bottom line is that we are a society built on credit, and if you’re not a multi-millionaire, there is a good chance you’ll need some form of credit at some point in your lifetime.
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 banks and lenders. It‘s a necessary evil. When it comes time to borrow for a mortgage or any other very expensive item, we’ll only be granted financing if we 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 solid credit score to complement the above 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 and my credit score range.
Periodically check your credit report by ordering a free credit report from Annualcreditreport.com. Do note that it will not contain a credit score, but you can use these free credit reports to ensure nothing negative or reporting in error is outstanding. The good thing is you can actually get a free credit report without a credit card, which is a rarity these days.
If any lates 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. You should know when to say when. If you can’t afford something, don’t simply 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 conceived as an invitation to abuse your credit. It is a call to use credit responsibly to ensure that you’ll obtain the best possible financing when the time comes to make large purchases such as financing a home. Without established credit, it would be very difficult, if not impossible to obtain a mortgage.