Why is credit important? (2024)

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In 4,000 B.C., when Sumerian people began establishing the world’s first cities, credit was extended for what may have been the first time.

Loans were made with interest in the Sumerian city of Uruk and early versions of financial contracts were exchanged. In the centuries since, different methods of making loans have developed but the basic premise remains the same: People want things they can’t pay for all at once and credit makes it possible to obtain them.

As of the fourth quarter of 2022 A.D., American households collectively owe an estimated $16.9 trillion dollars. We’re using credit in very different ways than the Sumerians, but borrowing remains a huge part of our present-day economy. This raises key questions: Why is credit important and how can you get access to it when you need it? Let’s find out.

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  • Why is credit important?
  • Why do I need credit?
  • Why is good credit important?
  • What are the risks of credit?
  • Hear from an expert

Why is credit important?

When consumers and businesses can borrow money, economic transactions can take place efficiently and the economy can grow. Credit allows companies access to tools they need to produce the items we buy. A business that couldn’t borrow might be unable to buy the machines and raw goods or pay the employees it needs to make products and profit.

Credit also makes it possible for consumers to purchase things they need. Many items, from cars to houses, are too expensive for most people to pay for all at once. With credit, it’s possible to pay over time while accessing essential products and services when you need them.

Why do I need credit?

Although credit clearly has an important role to play in maintaining a functioning economy, you may still be wondering why you need credit as an individual.

“Loans are a necessary part of life for many,” says Katie Ross, education and development manager for American Consumer Credit Counseling.

Loans can enable wealth-building by allowing people to do things like pay for college, increase earning power, buy a home and benefit from rising property values, or start a business, Ross says.

“Having access to credit can also be helpful in an emergency,” explains Benjamin Jacobs, a certified financial planner at Elwood & Goetz in Athens, Georgia.

If unforeseen expenses arise or you need something you can’t afford, being able to borrow could be a lifesaver, he says.

Accessing credit is important for another reason in today’s society: consumer credit reporting. When you borrow money, creditors often report your behavior to credit-reporting agencies, including Equifax, Experian and TransUnion. Data on your financial behavior — such as whether you make loan payments late or fail to pay — is aggregated to create credit reports and evaluated to generate credit scores. Those reports and scores are used by lenders when they assess how risky it may be to lend to you.

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Why is good credit important?

So why do your credit reports and credit scores actually matter?

Your credit scores affect your ability to get credit in the future.

“If you have a poor credit score, you’ll be less likely to qualify for loans or credit. Or you’ll end up with a loan with a high interest rate and poor terms and conditions,” explains Ross.

But what if you don’t want to ever borrow and you’re committed to paying cash for your house, car and other big purchases? Even in these cases, having good credit matters, because credit scores are used for lots of things in the U.S.

Landlords may check your credit when deciding whether to rent to you. When you try to get a cellphone contract, your credit scores and reports are usually checked.

Your auto insurer also may take a look at your credit scores when deciding what rates you’ll pay. And your credit can even affect your job prospects.

“Depending on the state you live in, employers can request a modified credit report from the credit bureaus,” Ross says. “It’s possible to be denied because of negative marks on your credit report.”

What are the risks of credit?

If you were wondering why is credit important, now you know. But just because credit helps you build wealth and participate in the economy, doesn’t mean using it is always good. Credit is a tool, and like most tools, it can be misused.

Since your credit scores are used to measure your reliability, inconsistent borrowing behavior and low credit scores will likely make people and companies reluctant to do business with you. You may not be able to get a cellphone contract without a large deposit, or a landlord may not rent to you.

Another big risk: borrowing costs money — in fees and interest — and it’s possible to borrow more than you can repay.

“If a consumer doesn’t know how to handle the credit they have available to them, they could end up paying a lot in interest, as well as paying fines or penalties,” Jacobs says. “This could end up spiraling, and I’ve seen consumers who end up having to file bankruptcy because it spirals out of control so much.”

To avoid problems, Ross says, you should limit borrowing and take out loans only if you can easily repay them. She says it’s also important to distinguish between so-called “bad” debt — debt used to buy things just because you want them — and “good” debt, such as a mortgage or student loans that can help build wealth in the long term.

Bottom line

Getting by without credit can be difficult because the U.S. is a credit-based economy. Without the ability to borrow — and without a positive credit history — you may not be able to make big purchases like a home or a college education and benefit from the wealth-building that may result.

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Hear from an expert

Q: Why is credit history so important?

A: It is important since it provides information to the lender about your financial stability. It reveals the level of risk they (lenders) will have to absorb when they deal with you.

Dr. Miren Ivankovic, Adjunct Professor of Economics, Clemson University

About the author: Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbo… Read more.

Why is credit important? (2024)


Why is credit so important? ›

Credit can be a powerful tool in achieving important financial goals. It allows you to make large purchases (such as a home or a dental practice) that you otherwise would not be able to afford if you were paying in cash.

What is credit and what is its importance? ›

Credit is a relationship between a borrower and a lender. The borrower borrows money from the lendor. The borrower pays back the money at a later date along with interest. Most people still think of credit as an agreement to buy something or get a service with the promise to pay for it later.

Why is credit important in our economy? ›

Credit drives economic growth, and enables people to maintain a higher quality of life, from purchasing a home to obtaining skills that lead to higher wages, even financing a computer for college. The ability to borrow makes it possible to purchase goods and services without having to pay for it all up front.

Do you need credit for everything? ›

Most financial milestones, from getting a credit card to buying a house, require credit. If you have a thin credit file you're more likely to be turned down or face higher interest rates.

Why is taking credit important? ›

Credit is a tool that can be used for good but may be problematic if you don't know how to use it effectively. Using credit reliably and earning good credit scores can help you build wealth and allow you to do business with companies — but you can get into trouble if you don't understand how credit works.

Why is credit important for students? ›

One essential aspect of financial well-being that college students often overlook is building credit. While it might not be the most exciting topic, building good credit during your college years can open doors to better opportunities and set you up for financial success after graduation.

Is credit good or bad? ›

Good credit can be the make-or-break detail that determines whether you get a mortgage, car loan or student loan. Bad credit, on the other hand, will make it difficult to get a credit card with a low interest rate and more expensive to borrow money for any purpose.

Why do people require credit? ›

Using credit can let you make purchases you may not be able to immediately afford. This can be helpful for household items such as televisions, refrigerators, or sofas, as well as for bigger expenditures like a house or a car. Without the option of taking out credit, it can take a long time to save up for these things.

What is the role of credit? ›

In a nutshell, a 'credit' is basically the practice of borrowing money, be it for a purchase or as a loan with the promise of paying off the debt within a stipulated amount of time. The failure to do that adds on to the overdue sum a certain amount of interest.

Is a 0 credit score good? ›

No. Fortunately, no one's credit score can equal zero – the range for FICO scores is 300-850 – and even people with poor or bad credit have a credit score of at least 300. A “no credit score” means there is insufficient information for a credit score calculator to compute a score.

Do I really need credit? ›

For you to survive without credit, you have to manage your own finances by saving at least 10 percent of your income each year. However, if you are not making enough to make ends meet, that is not likely." "The most important part is making sure 10 percent of your salary is enough to cover unforeseen costs.

Can you never use credit? ›

It's important to keep your credit utilization ratio under 30% — this is a healthy balance of using your credit to a reasonable degree. However, never using your credit card could result in a lack of financial data for lenders/bureaus to collect to determine your credit score.

What is the impact of credit on our lives? ›

Credit scores play a huge role in your financial life. They help lenders decide whether you're a good risk. Your score can mean approval or denial of a loan. It can also factor into how much you're charged in interest, which can make debt more or less expensive for you.

Why is credit usage important? ›

To lenders, this may be a sign that you are spending more than you can afford and you can't reliably pay your bills. So, if they extend additional credit to you, they risk loss. A low credit utilization ratio, on the other hand, shows lenders that you are capable of repaying what you owe.

Is credit really needed? ›

Ultimately, whether you really need credit is up to you. It's a personal decision that shouldn't be taken lightly. Only those responsible enough to use credit as a tool should include it in their financial plan.

What is the purpose benefits of using credit? ›

If you truly have a need for something on sale and don't have the cash to get it, credit allows you to get it now. Establishes a credit history. Buying something on credit with some creditors (even when you can afford to pay cash for it) means you have a credit record.


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