All About Credit

What is Credit?

Credit is money that you can borrow with the promise to repay it at a later date.

Credit is not free. It allows you to borrow money when you don’t have cash, but you may be charged interest and fees. There are two main types of credit: Installment Credit and Revolving Credit.

Installment CreditRevolving Credit
This is credit that you use to borrow money and promise to repay in equal amounts over a specific period of time.This is credit that allows you to borrow a pre-established amount over and over again, as long as your account is in good standing. Each month, you repay the amount borrowed in-full or you make a partial payment.
Example of installment credit:
Hilary signs an auto loan in which the agreement requires that she pays the lender $350 each month for six years.
Example of revolving credit:
Max signs up for a credit card. He is given a card that will allow him to borrow up to $500. 
He uses the card to make purchases that total $125. Now he only has $375 credit left.
At the end of the month, Max receives his statement.  
  • He can choose to pay off what he owes in-full ($125) so that he’ll have $500 that he can use next month. 
  • Max can choose to pay the monthly minimum amount ($25), but he will have only $400 credit available the next month. Because he only pays the minimum, Max will owe interest. 

Why Is It So Important to Have Credit?

Good credit is necessary if you plan to make a major purchase and have to borrow the money. You need to establish good credit. Good credit means that you pay your bills on time and you don’t have too much debt. The importance of good credit also goes beyond purchases. It also means that you will be able to do things like rent an apartment in your own name, have a cell phone, or pay lower insurance rates. It may even help with getting a job because some employers will ask to check your credit score before deciding to hire you.

How Do You Establish Credit?

There are several ways you can establish credit. You need to show potential lenders that you will be responsible for paying back a loan in the time period that you said you would. How can you do this?  

  • You can take out a personal loan from a bank and pay it back on time.  
  • You can get a credit card, charge purchases on your card, and pay your monthly credit card bill by the due date.  
  • You can even establish credit by paying rent and utility bills on time.

Helpful Tip!

Here are some ideas for how to prepare for unexpected expenses:

  • Build up an emergency cash fund in your savings account.
  • Build good credit so you can borrow from your credit union or bank.
  • Keep a credit card for emergency expenses.


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