Credit and debt –
How are these two related?
You cannot borrow if you do not have enough credit (in the sense of credit rating and credit score). Again if you have too much of debt, it is going to have a negative effect on your credit. One is inversely proportional to the other. If you need to take out new credit and debt like that of a credit card or mortgage or any other type of loan, you will have to make sure that you have good credit rating and a good credit score. However, it isn’t possible to have an established credit without you borrowing.
How debt affects credit and vice versa
In most of the cases it has been seen that you have either zero credit or bad credit, lenders or creditors do not approve your credit application. Therefore, it is important for you to both establish credit and maintain it too so that you can borrow when required. Again, if you borrow more and if you fail to pay back what you have borrowed, it is going to have a negative effect on your credit. So, you can see that credit and debt affect the other.
In order to establish credit, you would be required to try and obtain a credit card or loan. As you cannot obtain it in your name without credit, you can take a co-signer who has enough and established credit. If it’s a credit card, charge it in little amounts and try to pay back within the stipulated time, this helps in building credit. As for bad credit, you need to pay down the debts. That helps in improvement of your credit rating.
If you borrow only as per your requirement and as per your affordability, will you be able to repay the same. You should not go on using credit cards at every instance otherwise you will end up too deep in debt. This again is going to lower your credit rating and even your ability to borrow again. For example, you can or should use your credit cards only in emergencies and not for the purpose of everyday shopping. Credit cards are handy financial tools but it also leads you easily into the debt trap. You will pile up debts even before you realize what the evil it has done.
But there also are various such situations in which you may have no other option but to borrow. This can be both because you do not have enough cash or else, it is going to help you in the long run. The best example of this situation is home buying. Here, you are required o finance the home rather than buying it on cash. Even if you have money, financing is considered to be the best option as it helps in building equity in your home. As you go on to make the payments, with time equity builds up. In addition, this also helps in maintenance and improvement of your credit.
This is how credit and debt are interrelated. You will have to keep track of both in order to maintain both.
How should I plan my personal budget? Why do I always end up paying all my income towards the bills? What are the good debts and bad debts?
credit and debt