Consumer advocates and financial industry leaders decry credit as one of the worst things for any person any where and at any time. Many blame credit for the out of control debt that consumers (and the United States as a nation) face today. The truth is that credit is one of the greatest tools that consumers have ever been given. It opens up opportunities for individuals, companies and even communities that would otherwise be missed completely.
Credit it not a new tool for the financial industry. It has been around as long as there has been an economy. Merchants quickly learned that consumers needed the ability to buy now but pay later (usually when the crops came in or some other similar transaction occurred). Many people were simply living on a yearly budget and the merchants were the tally.
The amount of credit and the common use of that credit have grown over the years. Consumers prefer the ease of credit (and the forced payments) to the discipline of savings. The United States leads the world in consumer borrowing and it has become the land of opportunity and easy credit. It is possible for almost any consumer to walk into a business and get a credit line. The only hitch is the amount of interest that consumer will pay and the available credit that the lender will be able to give that consumer.
Credit ratings are one of the top determining factors when it comes to borrowing in the United States. Lenders are more interested in how consumers have handled credit in the past than they are in how they might be able to handle credit in the future. Although some of the lending practices have changed during the recent economic shake up, fundamentally the lenders want to see proof of repayment and that is reflected in the credit scores.
A high credit score shows a consumer’s financial integrity. It means that the debt will be paid and it will be paid on time consistently. The amount of credit already out is consistent with the consumer’s ability to pay. A high credit score is power when viewed in financial terms.
Think of the credit score as the modern day version of “a good name.” Before the computers came along and made it possible to view all transactions at the click of a button, lenders had to know the person before giving the loan. Personal integrity – when a man (or woman) followed through on what he said or did – put enough trust in the lender to give that consumer the loan requested.
A build up of integrity in the financial industry translates to a credit score that allows a consumer to pursue purchase opportunities and also encourages lenders to seek out certain potential borrowers. The reasons behind the credit may have changed over the years, but the reasons why lenders give the credit has not.
The economy has always been grown and directed by a number of financial tools. Credit is one of those tools that have done more to spur the growth than most others combined. The ability to make purchases based on future income instead of using cash in hand has allowed business to expand and consumers to fuel that expansion.
The financial problems that the economy faces today, and ultimately that individuals face, can not be attributed to credit. Credit is not evil and it does not drag people into the pit of debt. It is simply a tool that can be utilized to make a situation easier and better for all involved. But like any tool, it can be used incorrectly and when it is used wrong it can be detrimental to everyone that it touches.
Next: Helps and Hurts of Credit Ratings