Credit is not a bad thing by itself. The problem for some people lies in how they use credit. If you don’t understand when and why you should use credit, it can lead to negative consequences. On the other hand if you learn how to use credit effectively, you’ll be rewarded with a great credit score.
Here are the most important differences between good credit vs. bad credit that you should know about.
People who end up with credit tend to have a “buy now, think about paying later” mentality. This can cause you to spend more than you intended and pay more later through interest and fees.
This happens when you use credit to buy things you can’t afford and don’t really need.
You regularly take advantage of introductory offers for cards such as “no interest for 12 months” with no plan to pay the debt before the offer expires.
Another way that you can end up with bad credit is by entering in to unfavorable lending agreements without really understanding the terms. Payday loans and cash advances are good examples of loans that get people into trouble with their credit.
The applications are often easy and can provide immediate cash. However, the drawback is that they work against your next paycheck which puts you into an unending cycle where you are using future earnings or loans to pay off past debt. In addition, these types of loans often come with high interest rates that mean that you can end up paying more than the original principal if the loan isn’t paid back according to the original terms.
While good credit is indicated by a borrower’s credit score, that credit score is also a reflection of the borrower’s choices. For example, people with good credit don’t spend beyond their means and pay their credit cards on-time and in full every month. They are current on their bills, including rent and utilities, and make sure that their bills are paid on time.
People with good credit may also have several credit accounts. However, the difference is in the fact that they do not max out their borrowing limits. To maintain a good credit score, it is recommended that you keep your credit utilization ratio at around 30% or less of your limit.
While it may seem that good credit is more difficult to maintain, it is essential that you pay attention to your credit score. Having good credit means that you will receive more favorable terms (e.g. lower interest rates, more flexible repayment plans) when you borrow money.