At some point in your life, you’re going to use credit. Credit is borrowed money that is used to buy goods and services. Credit is given to you by financial institutions, lenders, creditors, and others. You agree to pay back the amount you’ve borrowed plus any interest or fees on an agreed timetable.
You have access to four types of credit:
- Revolving credit is more known as credit cards. You’re given a maximum credit limit and you can charge up to that limit. You’re either required to pay the full amount or a minimum monthly payment.
- Installment loans are a form of credit. Creditors offer consumers a fixed amount paid in installments. An auto loan or a personal loan are types of installment loans. Mortgages are also considered installment loans.
- Charge cards are like credit cards but the issuer requires you to pay the full balance each month. You do not have the option of paying a monthly minimum. American Express is known to offer charge cards with no preset spending limits but requires full payment of all charges.
- Service credit is typically given by utility companies, cellular services, gyms, and other organizations that make you sign a contract and require a monthly payment. They typically do not report your payment history to credit bureaus but will report uncollectable funds.
Credit is necessary if you plan to borrow money to afford large purchases such as a home or a car. Creditors look at your history of repayment and the amounts of money you’ve borrowed to determine your ability and desire to repay your debts.
In some instances, your credit history (not your credit score) is used to determine work eligibility, housing, and utility access. Basically, they look at your credit to see how you manage contractual relationships and if you make good on your obligations.