Credit Ratings: A Realistic Perspective
In today’s current economic climate of uncertainty and credit crunches, it is more important than ever to have good credit. The question many people seem to have, however, is: “how can I get good credit in the first place?” Thus, it is worth examining what the purpose of credit ratings mean. Are credit ratings simply arbitrary numbers devised by malevolent credit bureaus that are meant to make getting loans a hassle and to spike up your credit card APR? Thankfully, this is not the case.
Credit ratings serve a very useful purpose: to show potential creditors whether or not a particular party is likely to pay back a loan based upon relevant past behavior. Consider this scenario: if someone hardly ever pays back their credit card loans, never pays their utility bills on time, and has $5,000 outstanding debt, then this person is very unlikely to be able to pay his bills on time in the future, and thus becomes a liability to a lender. His credit rating will reflect this accordingly, much to his dismay.
The answer to the question, “how do I get a good credit rating?” is, therefore, simple: pay bills on time. If this means limiting credit card expenditures to necessities and paying a greater amount than the minimum required each month, then that is one possible way of slowly showing potential creditors that a party is trustworthy and can pay bills on time. After all, that is all that credit ratings are: reflections of one’s likelihood of paying back loans on time.
When one thinks of credit ratings as not a number but as an actual index, a reflection of reality put into a simple and concise manner, it becomes much easier to set an action plan for increasing one’s credit rating. Rather than thinking in terms of numbers, it becomes a matter of, “how can I show potential creditors that I can pay bills on time?” This method is much more organic and natural than other ways of thinking about credit.
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