What Is Credit And Why Do You Need It?
What is credit?
Simply put, credit is borrowed money that you can use to purchase products and services. You get credit from a credit grantor, who you agree to pay back any amount spent/borrowed within an agreed-upon time, plus any applicable charges or fees.
Four types of credit
- Revolving credit – This is one of the most common type of credit. With revolving credit, you are given a maximum credit limit (for example, $5,000), and you can make purchases/charges up to that limit at any given time. Credit cards and home equity lines of credit are popular forms of revolving credit. They usually require minimum monthly payments and accrue interest if you carry a balance from month to month.
- Installment credit – This is another popular form of credit. Installment credit generally refers to a loan for a set amount of money with a fixed, recurring payment schedule. An example of this would be, you borrow $15,000 to purchase a new car and you have a term of 48 months to pay the balance off. There are numerous types of installment loans, including student loans, mortgages, auto loans, personal loans, and more.
- Open credit – This is a somewhat rare type of credit. A person can borrow up to a maximum amount (like a credit card), but it must be paid back in full each month. An example of open credit is a charge card, which is not the same thing as a credit card.
- Service credit – Most people use a form of service credit every day, from heat, electricity, phone, and similar services. Service credit is often one of the first forms of credit acquired by a person starting out on their own. Since this of credit is typically one of the first forms of credit utilized by a person, it’s important to stay on top of payments in the early years to establish a solid credit history.
Why do you need credit?
Good credit is necessary if you plan to make a major purchase that you can’t pay cash for. Common examples include a new car, home or even renting an apartment in some cases. Credit grantors review credit information to determine financial risk: If they lend you money, will you pay it back? Your credit history also factors into the interest rate you will pay on a loan or credit card. The more history you have of paying loan amounts off in a timely manner, the more likely you’ll receive a lower interest rate from a lender and in the long run saving you money.
Check your credit score for free!
One of the many perks of being an Honor Credit Union member is we provide you with your updated VantageScore four times per year, completely free. These quarterly updates are done through soft pulls of your credit, so rest assured these have absolutely no impact on your score itself.
- Login to online banking on your desktop computer
- Under the “My Accounts” tab, select Credit Score
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Improve Your Credit Score
Unfortunately, there is no “quick fix” to improve your credit score, but we’ve partnered with GreenPath Financial Wellness to help you understand the steps it will take and guide you through the process. The best part is GreenPath will walk you through a review of your credit report FOR FREE!