Like a school transcript, your credit follows you for life

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Your credit is your reputation as a borrower.  Paired with your credit score, it tells lenders how likely you are to repay loans and helps them decide whether to approve you for credit and how much to charge you for it.

Types of credit

There are four types of credit:

  • Revolving credit. You have a credit limit that you can spend again as you pay it off. Unless you pay off the card balance each month, you carry a balance from month to month and pay interest on it. Most credit cards are a type of revolving credit.
  • Charge cards. These look like revolving credit cards, but with a charge account you must pay off the full balance every month. The old American Express cards are a good example of this.
  • Service credit. When you sign up for electricity, cable, cellphone, water, a gym membership or other similar services, you agree to pay the company in exchange for its services each month.
  • Installment credit. Car loans and mortgages are two examples of installment credit. With this type of credit, a creditor loans you a specific amount of money and you agree to pay it back with interest. You pay regular installments that are a fixed amount.

When credit is a good thing

Unless you go through life on a cash-only basis, you are going to need credit. Good credit will allow you to get student loans, a mortgage, auto loans, business loans and money to pay for other things you may need. Good credit also can affect your job search because many employers check credit scores of potential employees.

Credit is a good thing when you manage it well and maintain a high credit score. Among the benefits of maintaining a high credit score:

  • Lower interest rates. The higher your score, the more confident lenders are that you will repay as promised and the lower your interest rate is likely to be.
  • Better chance for loan approval. Sometimes, you need credit when you least expect it, like when the transmission on your car blows. Having a high credit score means you have a greater chance of being approved for a loan.
  • Greater negotiating power. Imagine sitting down with a finance manager at a car dealership and you have a poor credit history. He has all the leverage. The higher your credit score, the more options you have. That finance manager knows you can walk away and probably get a deal someplace else. When it is properly managed, your credit gives you leverage.
  • Less stress. It seems that everyone, from landlords to auto insurers and utility companies, checks your credit rating before doing business with you. A healthy credit score can ease the way and save you the anxiety of wondering whether you will be approved for an apartment, for example, without having to pay a higher deposit.

How to keep your credit healthy

Follow these tips to obtain — and maintain — a healthy credit score. The better your credit, the easier it is to get more.

  • Be organized. Put all your bills in one place as soon as you get them in the mail. Maintain a list of the bills you have due and mark them off as you pay them each month. Decide which day or days each month you are going to pay bills.
  • Pay attention to due dates. Mail your payment or schedule an online payment at least a week before the due date.
  • Sign up for automatic payments. Make sure auto payments are scheduled on days when you have sufficient funds in your account to pay them.
  • Pay what you owe. Ideally, pay more than the minimum, but if the minimum is all you can afford, make sure you pay it.
