The importance of using credit
No matter what stage of life you’re in, your use of credit is a key factor in your financial journey. Whether you’re looking to take out student or auto loans, purchase a new home, start a business, or make retirement plans, having good credit will go a long way. You can’t have a good credit score without using credit regularly -- and having a credit card is often the easiest way to do that.
What is credit?
Let’s start by highlighting what credit is exactly. Credit is the ability for a buyer to purchase a good or service before making a payment. Credit is based on the trust or agreement that the buyer will make the payment in the future.
There are two main types of credit – revolving and installment.
Revolving credit is an open, indefinite account that a buyer can use repeatedly, typically with a credit card that allows the account owner to make payments by a scheduled date. Credit card accounts come with credit limits, and the limit goes down as purchases are made, and then goes back up when a payment is made. This type of credit can also be issued as a line of credit.
Installment credit is commonly referred to as a loan. This could be a loan for purchasing a car, home, business, education, or any other significant purchase. A loan has a set repayment schedule, monthly rate, interest rates, and fees that are agreed upon when taking out the loan.
Why is using credit important?
Having a reputable history of using credit and making payments on time will put you in a good position to take out a loan if it’s needed. Lenders are more likely to provide a loan to consumers who have proven to have reliably made their payments. Opening an account and using a credit card for purchases is one of the best ways consumers can start to build a strong credit score.
Beyond taking out loans for major purchases, credit can impact an individual’s ability to rent an apartment, open a utility account, or obtain certain types of insurance. In some states, employers can run a credit check on job seekers.
The bottom line is that to make any large purchases or life moves, you want to have a good credit score on your side. Read our previous article for advice on using credit wisely and building a good credit score.