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What is credit, its types, and how it should be handled?

Credit is the ability to borrow money from a creditor through a contract, that ensures you have the knowledge of an increased interest rate. This leads to your creditworthiness, based on your credit history of repaying funds and the records of borrowing, resulting in a good or bad credit score. 

What is Credit, its types, and how it should be handled?

Credit is the ability to borrow money from a creditor (lender, merchant, service provider etc.), falling into a contractual agreement under the understanding of paying back the money later with an interest rate. Simultaneously, it defines the extent of how much you can borrow money or other goods services. Creditors will grant you money based on the accountability that you will be able to pay them back of what you borrowed and any additional applying charges. This leads to your creditworthiness, based on your credit history of repaying funds and the records of borrowing, resulting in a good or bad credit score. If you pay back your lenders on time with interest rates, you are said to be creditworthy and you will be able to apply for loans in the future with favorable terms, such as lower interest rates and higher limits. Credit is a reflection of your reputation on repaying your debts. For example, if your credit is not good, it is suggestive that you are unable to pay your loans on time, hurting your chances of getting a loan with lower interest rates.

In terms of your financial goals, credit will help you grow. Career-wise, it allows you to buy inventory and obtain greater working capital, setting the tone for your financial goals’ future. Credit gives you the ability to borrow money you do not have, and is applicable in buying a home, renting an apartment, getting new equipment, financing in leasing or owning a car, and getting a good insurance policy.

Types of Credit: 

Credit varies in what you need specifically. There are four types of credit: 

  • Revolving credit: Most credit cards fall under the category of revolving credit, providing you a maximum borrowing limit and the ability to make charges up to that limit. A requirement is that you must pay a minimum amount each month, with the paid amount being any portion of outstanding charges up to the full amount. 
  • Charge cards: Charge cards are relatively rare nowadays. Although they are used nearly the same way as credit cards, they do not permit you to carry a balance, and you must pay all charges fully every month. 
  • Service Credit: This is a credit agreement with your service providers (gas and electric utilities, cable and internet services, cellular phone companies, gyms etc.) providing services monthly under the understanding that you will pay them after. While modern credit scoring systems may factor your service payments in your credit history, they are not always reported to the credit bureaus.
  • Installment Credit: Installment credit is a loan for specific sums you agree to repay (plus interests and fees), over a series of equally monthly installments (payments) over a set period of time (example: student loans, car loans, mortgages).  

How should credit be handled? 

It is important to note that once credit is rebuilt, it needs to be maintained. Establishing a good credit history and maintaining a good credit score is not an easy task, and one must be very cautious and careful when managing their credit. Credit should be handled responsibly to avoid the risk of accumulating debt one cannot pay. It is easy to get caught up in online shopping, and forgetting to leave enough credit in cases of emergency. This is why it is important for you to establish a good credit history, paying your bills on time, and not putting yourself into a credit risk zone. You do not want late fees to become your monthly problem, and your interest rates getting larger and larger, making it difficult for you in getting loans or credit in the future.

In pursuing a long path to healthy credit, keeping the balance limit below 30% is a great way to go. Cash avoidance is preferable, as you are likely to be charged additional fees and higher interest rates, so only use in case of emergencies. Another great way to manage your credit is by keeping track of it constantly, even before you receive the bill in the mail, and make a habit of saving your receipts and checking them against your statement.

If any trouble occurs, take action immediately. Talk with a credit expert, call your issuing card company, and become informed about credit.

Lenders may check for specific information in your credit report when it comes to lending you a loan, so identifying and correcting credit error reports are important for your financial goals. You are able to review your credit report upon your request, and checking your credit report doesn’t hurt or help your credit score. You get a free copy of your credit report annually under federal law. Your credit report includes the number of credit-cards and accounts you own, their borrowing limits and outstanding balances, amounts of loans taken and amounts you have paid back, if payments were made on time, and financial setbacks, such as mortgage foreclosures, car repossessions and bankruptcies.