Your credit is simply your financial reputation. It gives lenders, and others, a tool to help decide whether or not they will do business with you. If you want to use their services, they want to manage their risk. The last thing a lender wants to do is give out money, only to have the borrower default on the debt. When this happens, the lender loses money. Of course, lenders are not charities — they are in business to earn money from interest payments, not to lose it.

The system of using credit in the United States serves a variety of purposes. First, this is a big country with a lot of people. It is difficult for any business to know everything about everybody. When the world was a much smaller place, a lender might make a lending decision based on an individual's reputation. In small communities, this would be easy. However, these days most loans come from large national, or international, organizations. They don't know your personal reputation, so they have to check your credit. In this way, credit serves as a way for lenders to share information so that they can make good decisions.

The fact that everybody can share information about you is extremely significant. Knowing that your creditors will spread the word about you gives you an incentive to pay your debts as agreed. If you knew you could borrow money and get away with defaulting on the debt, you might be tempted to do so quite often. After all, free money is enticing. Alas, there is no such thing. You might get away with it once or twice, but you will build up a bad reputation. Creditors depend on the fact that you want to have a good reputation so that you can borrow from others in the future.