Your credit is your reputation as a borrower. Paired with
score, it tells lenders how likely you are to repay loans and
helps them decide whether to approve you for credit and how much to
charge you for it.
Types of credit
There are four types of credit:
- Revolving credit. You have a credit limit that
you can spend again as you pay it off. Unless you pay off the card
balance each month, you carry a balance from month to month and pay
interest on it. Most credit cards are a type of revolving
- Charge cards. These look like revolving credit
cards, but with a charge account you must pay off the full balance
every month. The old American Express cards are a good example of
- Service credit. When you sign up for
electricity, cable, cellphone, water, a gym membership or other
similar services, you agree to pay the company in exchange for its
services each month.
- Installment credit. Car loans and mortgages
are two examples of installment credit. With this type of credit, a
creditor loans you a specific amount of money and you agree to pay
it back with interest. You pay regular installments that are a
When credit is a good thing
Unless you go through life on a cash-only basis, you are going
to need credit. Good credit will allow you to get student loans, a
mortgage, auto loans, business loans and money to
pay for other things you may need. Good credit also can affect your
job search because many employers check credit scores of potential
Credit is a good thing when you manage it well and maintain a
high credit score. Among the benefits of maintaining a high credit
- Lower interest rates. The higher your score,
the more confident lenders are that you will repay as promised and
the lower your interest rate is likely to be.
- Better chance for loan approval. Sometimes,
you need credit when you least expect it, like when the
transmission on your car blows. Having a high credit score means
you have a greater chance of being approved for a loan.
- Greater negotiating power. Imagine sitting
down with a finance manager at a car dealership and you have a poor
credit history. He has all the leverage. The higher your credit
score, the more options you have. That finance manager knows you
can walk away and probably get a deal someplace else. When it is
properly managed, your credit gives you leverage.
- Less stress. It seems that everyone, from
landlords to auto insurers and utility companies, checks your
credit rating before doing business with you. A healthy credit
score can ease the way and save you the anxiety of wondering
whether you will be approved for an apartment, for example, without
having to pay a higher deposit.
How to keep your credit healthy
Follow these tips to obtain — and maintain — a healthy credit
score. The better your credit, the easier it is to get more.
- Be organized. Put all your bills in one place
as soon as you get them in the mail. Maintain a list of the bills
you have due and mark them off as you pay them each month. Decide
which day or days each month you are going to pay bills.
- Pay attention to due dates. Mail your payment
or schedule an online payment at least a week before the due
- Sign up for automatic payments. Make sure auto
payments are scheduled on days when you have sufficient funds in
your account to pay them.
- Pay what you owe. Ideally, pay more than the
minimum, but if the minimum is all you can afford, make sure you
calculator to determine how much house you can afford to