What is and Why do we need Credit?

1 Oct    Education

The one financial issue that is always brought forth to making a decision on any purchase, what credit card do I use?  But first, before you decide to choose that piece of plastic to slide and/or tap to make a purchase, you must truly understand what credit actually is and do you honestly need it.

According to Experian’s web site (experian.com), credit is borrowed money that you can use to purchase goods and services when you need them.  You receive a card from a particular financial institution (credit grantor) for which you sign an agreement to payback the amount you spend (or borrowed), plus any applicable finance charges and fees at a agreed upon time.

There are four types of credit:

  1. Revolving credit. With revolving credit, you are given a maximum credit limit, and you can make charges up to that limit.  Each month, you carry a balance and make a payment.  Most credit cards are a form of revolving credit.
  2. Charge cards. While they often look like revolving credit cards and are used in the same way, charge accounts differ in that you must pay the total balance every month.
  3. Service credit. Your agreements with service providers are all credit arrangements.  You receive electricity, mobile phone service, gym membership, etc., with the agreement that you will pay for them each month.  Not all service accounts are reported in your credit history.
  4. Installment credit. With installment credit, a creditor loans you a specific amount of money, and you agree to repay the money and interest in regular installments of a fixed amount over a set period of time.  Car loans and mortgages are two examples of installment credit.

Video Courtesy: Ramsey Solutions – Why Not Use Credit Cards?

Why do I need credit?

First, let me tell you a little about the famous FICO.  A FICO score is a type of credit score created by the Fair Isaac Corporation.  Financial institutions and/or credit grantors use this credit score to assess risk and determine whether to issue credit.  There are five factors while using credit that determines one’s FICO score: payment history, level of indebtedness, types of credit, length of your credit history, and the number of new credit accounts.  I will follow this posting up with a more detailed posting on what FICO is and when it was founded.  Ultimately, the FICO score tells you how well you are managing debt, and not your own money.

Now back to having credit and the supposedly reason(s) why you should have it.  The Fair Isaac Corporation, Equifax, Experian, Innovis, TransUnion and plus the thousands of financial institutions and services will all very convincingly suede you to have credit.  These industries spend billions of dollars on many forms of advertising and marketing to make having credit cards and financing a purchase as attractive and popular to the consumer for pure attraction.  This form of marketing and advertising is a form of brainwashing.  Credit services only benefit the big corporation and not you the consumer.

So do I need credit?  The truth is YOU DON”T.  When commonly asked, I receive the same answer every time.  I need credit to build history and my FICO credit score so I can buy a vehicle and/or house.  I usually say okay.  So then I ask, why do you need a FICO score?  The response is mostly to get credit.  So, do you see a picture that is being painted.  It easily resembles a ring, aka the ring of debt.  The FICO does not benefit you in any way.  Stay away from the FICO score at all costs.  The sooner you begin paying cash, avoiding debt, and running from FICO, the better off you’ll be in the long run.


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