What It Means To Establish Credit

Establishing credit means that you are taking steps to make sure that you will be considered a good credit risk. When you buy something on credit, a lender is trusting you to pay for it in the future. If you make your payments, the lender will want to do business with you again. If you don't, the lender will be less willing to extend credit in the future or will charge a higher interest rate.

If you continue to pay your bills, you’ll be considered a good credit risk. You’ll be able to get more credit with new lenders or increase your credit limit with your current credit card companies. You’ll be successful in obtaining a vehicle loan or a mortgage. However, if you don’t pay your bills or always pay them late, you’ll be labeled a bad credit risk and credit will be harder to obtain.

Your ability to pay back credit is reported to credit bureaus, which generate a credit report. A credit report is important because without it a lender has no way to determine if you are a bad credit risk. It is often easier for a lender to deny credit than take a risk.

If your financial goal is to have convenient access to credit, it is necessary to have a favorable credit history on file with one of the three major credit-reporting agency. Lenders will ask you to complete a credit application when you are seeking credit, and in the application you’ll be ask to give them permission to review your credit report.

Lenders will take the information you’ve provided in your credit application and will attempt to validate from a credit report. Sometimes they will attempt to verify it on their own, but since research costs them time and money, most likely they’ll rely on your credit report.