Debt is bad and a heavy burden on the financial independence of the borrower. And credit is what fuels the debt largely.

Credit culture in countries like United States, Mexico, European and other countries has lead to financial catastrophe as individuals falling into debt trap apply for more credit cards and loans to get out of debt.

This is the reason why teaching yourself about credit is important before you enter the credit whirlpool.

So what you should know about credit

1. Credit does matter

Although taking a credit is putting into debt, in most of the cases. But from a macroeconomic perspective, credit helps businesses grow, especially micro and small businesses. In the absence of it, there would be very small and limited business growth. These young businesses are important because in addition to their growth, they generate new sources of employment.

But credit is important not just for businesses but even for individuals. For an individual’s personal finance, a good credit history plays a very important role and is actually a deciding factor in credit approval.

2. Credit is not so difficult to understand

The truth is that the process of giving credit can be deep and complex. But it’s not that hard to know the basics. You should start by knowing that there are different types of credit (personal loan, home loan, car loan, etc.) with each carrying different interest rates depending on the quantum of the loan and your credit history. So you have to be careful and know what you’re getting into.

But the basic thing to understand is that more the collateral, better the credit. This means that in credits where the lender has no security, it will protect itself by charging a lot for its money. And when collateral is kept, then the charge would be less.

To really understand how a credit works, you need to know all the specifications: interest rate, commissions, insurance, penalties, and advances, etc.

3. There are ways to improve credit…and your finances.

Fortunately, credit exists to facilitate your finances and improve your relationship with money.

Here are some very important tips to make you better with the money you borrow or want to borrow:

• Don’t be credit hungry: It is important to not ask for multiple credits at the same time. There is a small difference between learning about a loan and applying for it. When you do your research and visit different banks, ask for all the information but don’t make a formal request that gives them permission to review your credit history.
• Do not keep too many open credits: Credits can be good, but it doesn’t make sense to have more than 4 or 5 open credits.
• Limit use of credit cards: Remember to use only 50% or less of your line of credit to maintain healthy debt.
• Don’t ask for more money, or more time, than you need: It’s very important that when you apply for credit, you only do it for the amount you need, no matter whether you are eligible for more. Also, when you are going to ask for it, don’t opt for longer term.
• Take care of the level of your debt: Remember that the sum of all your debts should not exceed 36% of your income. This is a general recommendation from the bank and is a reference for a lender to evaluate whether or not you deserve more credit.
• Start managing credit from a young age: You should try to be the most attractive thing for the bank from a young age. To achieve this, you can start building a credit history with basic credit cards, with TV plans, and you will be able to use them for the rest of your life.

Remember – used credit increases your wealth. Misused credit can lead to bankruptcy.

Author Bio:

Hi, I am Nikesh Mehta owner and writer of this site.

I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business.

I can be reached at nikeshmehta@allonmoney.com. You may also visit my LinkedIn profile.