New to this country, been here about 4 months, prior to coming I was told I preferably should get stuff (like a car, tv or a Mobile phone) under credit rather than paying the full price cash because it will affect in my credit score… So I need more information about how does it improve my credit score and why is it so important to get stuff in credit
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It shows that you can be reliable if you are loaned money. If you can spend on a credit card and pay it off every month then it is more likely you could pay a mortgage or car payment and pay it off every month.
Credit matters in order to get more credit. For example, if you ever plan to take out a mortgage, lenders will be looking at your credit history to assess loan risk. You generally start building credit with smaller purchases, usually via credit cards or small installment loans.
Your credit history tracks your ability to pay off loans. It helps to build up your credit history early with items you can easily pay off before the interest rates get applied. By doing this, when it comes time to take on large loans like a house mortgage or a car loan, you won’t be viewed as a financial risk by the bank. That usually results in lower interest rates.
Before yoy borrow money in one way or another (store account, credit card, loans) you don’t have a credit score. There’s no numerical data available to lenders about whether you make debt payments on time and refrain from getting over your head in debt. This means lenders won’t want to give you big loan, and landlords are less likely to trust you’ll pay your rent on time.
If you have an income, you can generally start building credit by taking out a small, low-interest personal loan and getting a credit card with a low amount of credit available. If you make your payments on time, you’ll build good credit. For your own financial health, make sure to always pay down your principal on loans, and don’t carry a balance in your credit card (pay it off every month).
Having credit history is like a resume for other banks/lenders to see how responsible you are about managing debts. Theres many variables that affect credit score (Payment history and amount of debt being the most impactful).
But its good to get in early as having a longer history of reliability will help you get approved for whatever you need
A car is a necessity in most of the country, and in the not too distant past, interest rates were low so you wouldn’t have to blow $10-40k in cash all at once. Even today, its still a necessity and if it enables you to get to your job and live your life, many people do it. These are called auto loans, and while they might broadly fall under the “credit” umbrella, most people would just say auto loan. Same thing with house/mortgage.
Of course if you’re rich you probably don’t need to do any of that and can just pay cash for everything.
But for most of us, we’d need to take loans out for the most major expenses that we make.
A TV or mobile phone might be purchased through a credit card. Having a credit card that you keep no long-term balance on shows you’re responsible with credit, but also buying on a credit card protects you. If you order something, or buy something at a store, and at home open the box and it’s not what you bought, there is a final protection if the vendor refuses to fix the problem that you can “charge back” the charge and the if the credit card company agrees you now have a powerful ally in your dispute. If you’d paid cash, your only recourse is a lawsuit.
A car would be bought on a loan from a credit union or your bank (or worst case scenario a dealer-supplied loan), and having and paying it off also builds your “credit score”, which enables you to get better interest rates in the future because you’re a known responsible borrower and less of a risk. This type of loan can enable big purchases when you don’t have the cash available, but is backed by the object itself (ie. if you stop paying they come take your car and no one lends you any money again for a few of years). It’s a different use of credit.