To fully understand the importance of credit reports and how they help calculate your financial future, you must first understand what credit means. By definition, credit is using the amount of trust you’ve earned from your bank as currency to make a purchase. In laymen’s terms, credit works somewhat like a modern day I.O.U. (I owe you) currency that promises you will pay off the full amount in the future.
This type of credit purchasing can come in the form of a loan, a credit card, a in-store credit card you apply for, or even receiving money from a friend. Credit is a beautiful way to build up your reputation with banks and the financial system over the course of many years. Many areas of your life are dictated by your credit score and your history with payments. Purchases like homes, cars, renting a house, and even applying for certain jobs may require that you undergo a credit check. This credit check will signify what type of person you are according to your payment history of credit that you’ve taken out.
Why Credit Reports are Important
Now that you understand the basics of how credit works, let’s go into detail as to why you need to inquire about credit reports. Credit reports act as a track record for your financial past. When you ask for a credit report you will receive a detailed breakdown of all the debts that you’ve acquired throughout your life and which ones still need to be paid.
Credit reports are a tactical way to address past debts that you’ve acquired and pay them off in a timely manner. Similarly, your credit report might show that your credit history has been rough and that you’ve missed many payments along the way. The report will show an overall ‘score’ that dictates how healthy your credit score is.
According to Credit.com, the credit score system is broken down as the following:
- Superior Credit Score: 781 – 850
- Excellent Credit: 661 – 780
- Fair Credit: 601 – 660
- Bad Credit: 501 – 600
- Horrible Credit: 500 and Below
If your score is low, don’t fret! There are tactics and procedures that you can start taking immediately in order to change that credit score. Remember, many of the areas of your life will be dictated by this number and it’s underlying history.
The first tactic you can take is eliminating your debt. Bottom line, debt is hurting your overall credit score. Once this debt is addressed, it’s time to consult the bank about a secured credit card. This card allows you to pay in a chosen amount (usually $300 – $500) for one year. You can use this credit card up to that amount that you’ve paid in to your bank. You make payments on this card every month for the 12 month period in order to improve your credit score.