Credit and Living Free of Debt
- Credit is NOT money.
- Credit is NOT a status symbol.
- Credit is NOT the same as debt.
- Credit is NOT a loan.
- Credit is NOT a representation of your personal character.
While related, credit and debt are not the same thing. You can use credit wisely and responsibly while staying out of debt. However, incurring excessive credit card, retail, auto, and other debts will almost always lead to lower credit ratings.
Typically, as your debt balances and any missed monthly payments increase, your credit score decreases. Conversely, as you pay off your debts and get caught up on your monthly payments, your credit rating inevitably goes up.
So What Is Credit?
Lenders use credit to minimize financial loss by forecasting the potential risk in lending to a specific borrower.
Credit score models like FICO and VantageScore base their predictions of future behavior on the consumer’s past behavior. Some of our past actions are better predictors of our future behavior than others. Credit scoring models digitize these actions and run them through their algorithms to produce a reliable risk rating.
Credit is also a tool to minimize the interest you pay on future loans.
Your credit rating is just a statistical number attempting to predict how likely you are to miss future debt payments. The higher your score, the more the prospective lender can trust you will pay as agreed. Thus, the lender feels more confident offering you lower interest rates and better repayment terms.
