Establishing and Maintaining Credit

Image of young man with shocked expression and the words bad credit risk over his head. Let's say you've always been responsible with your money and pay back any money you borrowed from your friends or relatives. You have a job and some savings and you know how to manage your money because you have a budget that you stick to and don't waste your money on frivolous things. Everyone you know has a good opinion of you and knows you're dependable.

Imagine you run a small business, and you'd like to buy some new equipment so that you can take on more customers to make even more money. You go to the bank and apply for a loan, but they reject your application because you don't have any credit history. Sure you do, you tell them. You pay back money that you borrow on time and are a good credit risk because you run a profitable business and are responsible. The bank says that they're sorry, but the only opinions they care about are those of three companies you've never heard of: Experian®, Equifax®, and TransUnion®, and those companies have never heard of you. Since you have no credit history, the bank won't lend you money.

It may not sound fair, but that's how it is. Until you start establishing a credit history with the big three credit reporting agencies Experian®, Equifax®, and TransUnion®, it's going to be difficult to borrow money or finance your purchases. The same is true if the big three do know about you and identify you as a bad credit risk because you don't pay your bills on time.

Establishing and maintaining a good credit history is one of the most important things you can do as a consumer. With a good credit rating, you'll be able to borrow money when you need it at the lowest interest rates. With a bad credit rating, you'll only be able to borrow from a limited number of companies, and will probably end up paying the highest interest rates. In other words, you'll have to pay more finance charges, often much more.

Since you're young, you may not have a credit history yet, so it's extremely important that you start on the road to establishing a good credit history. In this lesson, we'll look at what's involved.

Essential Question

  • How does one establish and maintain a good credit rating and why is it important?