Are you interested in learning what credit is and how to leverage the use of credit in your life?

Although fifty-five percent of Americans have a credit card with debt, this doesn’t mean you will be one of them. By learning about the different forms of credit and how to use them responsibly, you can credit to your advantage in your daily life.

Read on to learn the ins and out’s of how credit works and how you can use credit to improve your personal finances.

The Basics of Credit

What is credit and why does it matter? Whether you are young or old, the power of credit can change your life.

For example, suppose one day you get into your car to leave your house but it won’t start. You call and have your car towed to a mechanic who performs an inspection and finds that your car’s alternator has stopped working. He gives you the news—to fix your vehicle will cost $1,200. You don’t have the cash but you also can’t afford to go without your car until you do. 

This is a situation where paying for your car repair on credit may be a good idea. In its simplest form, credit is when a lender/creditor covers the cost of something you buy. In exchange for your agreement to pay them back in the future, they also charge interest on what you buy. Oftentimes, a creditor will charge the interest at a defined rate during the time that your debt is outstanding to the creditor.

Types of Credit

Credit takes on many different forms in the lives of Americans each day. Some of the most common types of credit people are familiar with are automobile loans, a home mortgage, and a credit card.

Automobile and home loans are forms of secured credit that you can use to make these large purchases. This credit is ‘secured’ by the asset that you buy using the credit.

When a bank lends you money for a home, they have an interest in the property. If you don’t pay your mortgage on time, the bank may foreclose its mortgage and sell your home.

The Importance of Having Good Credit

Each person that takes out a credit line or some form of a loan will be assigned a credit score. Your credit score is arguably the most important number in your life besides your social security number. 

Credit scores typically range from 300 to 850, with 300-629 being a poor score, 630-689 being fair, 690-719 being good, and anything above 720 being excellent. Having an excellent credit score will give you the opportunity to receive the best interest rates on loans. 

Some people with poor credit scores can take advantage of credit repair services to begin improving their scores.

While your goal should be to have an excellent credit score, this doesn’t happen overnight. Your credit score is based on many different factors including your credit history, your debt-to-income ratio, and timely payments made on previous loans.

How to Receive Credit

How can you begin building your credit score and take advantage of a credit line? Before you can begin using a credit line, you must fill out an application for credit. 

Depending on the kind of loan or credit you seek, your creditor may request lots of different information about you. Some of this includes your social security number, current income, and the cost of your monthly rent or mortgage payment. 

A creditor will use this information to pull a credit report on you to learn about any current or previous lines of credit you have. This report will show them when you first took out a line of credit, the size of your credit line, and your payment history.

By taking all these different factors into consideration, a creditor will decide whether to extend credit to you and the size of your credit line. 

Have a Plan to Pay Off Credit

Sometimes consumers are concerned about having multiple lines of credit because they are concerned about running up those balances and not paying them back.

Despite these concerns, you can build a better financial future for yourself by using credit to your advantage. For example, paying off a small credit card balance with timely payments when you are younger may be what shows a bank you are worthy of a loan for a house later in life. 

Arguably the most important aspect of a credit line is being responsible for your use of it. One good rule of thumb is to not charge anything to a credit card that you can’t afford to pay back at the end of the month. Despite this general rule – there certainly are exceptions. 

In the car repair example, a big expense may be too costly to pay off in one month but be sure you are making the minimum monthly payments. It’s also wise to adjust your spending habits to pay off the debt sooner than later to avoid being charged high amounts of interest on the debt.

Wrapping Up: Begin to Use Credit Today

Filling out a credit application may be intimidating at first glance but you can use credit to strengthen your personal finances.

Before you begin filling out a credit application, spend time learning about a creditor and how they charge interest. You should avoid taking out a loan or line of credit with a creditor that has a bad reputation.

By taking these steps to learn about credit and your lender before beginning to make your next large purchase, you will be more confident that you are making the best decision for your financial future.

Check out our blog post section to learn other helpful tips and tricks to put to use in your life today!

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