When the average person hears the word ‘debt’, they tend to associate it with things like bankruptcy, bills, and collections agencies. While it’s certainly better to be in the black than in the red, not all debt is inherently negative.

Here’s what you need to know about good debt vs bad debt.

Why should everyone have at least some kind of debt?

 

You need to have some kind of debt in order to build a credit score. Why do you need a credit score? Because it’s the only way to show potential lenders that you’re a responsible borrower. Even if you plan to pay for everything with cash and debit, there are going to be times when you need a loan.

Trying to buy a car or a home without an auto loan or a mortgage is almost impossible for the average person. And good luck renting an apartment if the landlord or property manager asks to see a copy of your credit history to confirm you’ll be able to make your payments on time.

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It happens to many of us at one point or another; you order your credit report and are stunned to see that your credit score dropped and is notably lower than what you were expecting it to be. So, what happened? And more importantly, what can you do to fix it?  Here are some of the most common reasons:

A Hard Inquiry Occurred

If you’ve recently applied for additional credit or someone pulled your credit file (a lender at a financial institution or a potential landlord, for example), your credit score likely dipped because they created something called a hard inquiry.

Unlike a soft inquiry (which most often occurs when you check your own credit score), a hard inquiry involves a third party requesting a copy of your file and temporarily lowers your credit score. It’s important to note that not all inquiries from third parties result in hard inquiries; an employer checking your credit report during the hiring process will not negatively affect your credit score, for example.

This is why it’s important not to apply for credit from too many places in too short a period of time.  The dip in your score can be disconcerting to see but it shouldn’t actually be a large enough decrease to negatively affect your ability to be approved for credit or other loans.

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Are you concerned about fraud or identity theft? Does the thought of discovering that someone has impersonated you and stolen anywhere between hundreds and thousands of dollars in your name give you anxiety? Then credit monitoring might be an option worth pursuing.

What is Credit Monitoring?

Credit monitoring is pretty much what it sounds like – you enlist one of the various financial companies out there to keep an eye on your credit for you and to loop you in the second there’s a concern or a change to your credit accounts.

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