By now, you have probably heard of the term credit. Good credit is an essential part of building a stable financial future. So, what exactly is credit, and why is it important?

Building a strong and stable credit history is an essential part of your financial health. Just like it’s necessary to save a portion of your income, having good credit can help you buy a car, rent an apartment, and get approved for a loan.

Ready to learn more about credit? We’ve got you covered. Here’s what you need to know to begin understanding credit.

Just What is credit?

When you buy something with credit, it means you are purchasing it now with the promise to pay for it later. Two common types of credit are installment loans and revolving credit. 

Installment loans

An installment loan is when you borrow a set amount of money and use it for a specific purpose, like a car loan, a student loan, or a mortgage. When you pay for something with installment credit, you’ll make equal monthly payments that include interest.

Revolving credit

Revolving credit is when a lender gives you a line of credit – up to a specific limit – and you then borrow from that amount and pay it off over time or even in one lump sum if you can. A common type of credit line comes in the form of money you spend on your credit card. In this instance, a credit company will extend to you a certain amount of credit, and you can spend up to that amount. Your payments each month will fluctuate based on how much you’ve borrowed.

How does a lender decide whether to loan me money?

Say you want to buy a car. You don’t have the cash to pay for it, so you apply for a loan. Pretty easy, right?

NOT. Before you can borrow that money, a lender needs to be confident that you’re going to repay the money. To be assured, the lender will look at several factors. The most important factor is your credit history.

Your credit history tells how you’ve spent money over a length of time. Your credit report may include how many credit cards and loans you have and whether you’ve paid your bills on time. If you’ve paid for almost everything in cash and have never borrowed any money, you probably won’t have much credit history. If you do, your accounts are summarized in a credit report.

Knowing how to build your credit score is vital to your financial future. We’ll teach you exactly how to do that here.