Why is your credit rating important?

I once had an employee who wanted to buy my van from me. I said “OK but you’re going to have to get someone to finance it for you”. He said “No problem. I’ve got great credit. I always pay for everything with cash”. Did I mention he was an idiot?

Having a good credit rating is first of all based on your history of using credit. That is you say I’ll make this payment every month and then you do. If you never use credit then there is no means of appraising how responsible you’re going to be.

“But why do I need credit”? Well one reason is that for most people the only way they are able to buy a home is with a mortgage. When you apply for a mortgage your costs are going to be much higher if you don’t have good credit. In fact you might not be able to get a mortgage at all.

But there is more to this. Many organizations have started to use Credit Reports as part of their screening process. So if you don’t have good credit you might not be able to rent the apartment you want or get the job you apply for.

This is serious stuff.

You really have to approach this from two directions; don’t do bad things and do do good things.

Here’s what I mean. A number of people who have never had a loan or a credit card already have Bad credit. How did this happen? There are many financial situations that won’t show up on your credit report unless you don’t make payments or are late in doing so.

A phone bill, a utility bill, rent, etc are not reported on your credit history showing that you made timely payments. They will show up if you’re delinquent in paying or if your account was turned over to a collection agency. These are the bad things you need to avoid.

But not doing bad is not enough. You have to have positive things on your credit report also.