Credit and debt are topics that are frequently brought into the same conversations, but they aren’t the same thing. Smart money management requires knowing the difference between these two terms. If you’re not clear on this topic, it’s time for Dovly 101: Let’s Talk Credit & Debt.
What is Credit?
Credit refers to the amount of money you can borrow. Whenever you take out a loan or buy something on a credit card, you’re able to buy things you want with borrowed money that you’ll gradually repay. The maximum amount that you can borrow on a credit card or on a revolving line of credit is your credit limit. Your lender establishes this credit limit based on your creditworthiness, and your credit report and credit score give potential lenders an idea of how well you’ve handled borrowing money to buy things on credit in the past.
What is Debt?
Debt is money you’ve borrowed but not yet repaid. When you borrow money to buy a car or house or use your available credit on a line of credit or credit card, you create debt. If you handle your bills responsibly, your debt won’t get overwhelming.
Consumers often make the mistake of thinking that it’s ok to spend most or all the credit available to them, but this is a mistake. This can create bills that are difficult or impossible to keep up with.
Is All Debt Bad?
Not all debt is bad debt. A mortgage or credit line allows you to make a major purchase and pay for it over time. Credit that’s been extended to you can also help you to buy a car, finance your education or pay for an unexpected expense such as medical bills or a major repair.
Bad debt is debt that you’re not able to repay. A sign that you could be getting in over your head is that you’re having difficulty making the minimum payment on credit cards or that you’ve used most of your available credit line. Whenever possible, you should try to use 30 percent or less of the available credit on a credit card or line of credit.
How Debt Can Impact Your Credit
Your outstanding debt is reported to the credit bureau each month to provide potential lenders with information about the likelihood that you’ll repay borrowed money. Carrying too much debt or not paying your bills as agreed can hurt your credit score and make it harder to borrow money in the future.
Making Sure Your Credit Report is Accurate
Since your credit report is being used as a sort of report card, it’s important to make sure that what’s being reported is accurate. Consumers are entitled to a free credit report each year from AnnualCreditReport.com. Check your credit reports and make sure that there are no errors or misinformation. If you find errors, dispute them immediately.
Dovly can help you dispute errors on your credit report. We’re an AI credit engine that can help you track, manage and fix your credit. Try it risk-free with our free membership tier.
