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The credit we are discussing specifically is "consumer credit." According to Wikipedia:
"Consumer credit can be defined as money, goods or services provided to an individual in lieu of payment."
Credit is the short term definition of financial trustworthiness. When looking to make a financial move your credit is going to play the biggest role in whether or not the lender is willing to give you the loan.
According to Chase;
"Building a good credit record is an important step in reaching financial independence and can be established by:
Applying for and using credit card for purchases
Using a student loan for tuition and books
Making at least the minimum payment due
Paying all your debts on time"
Basically consumers use credit as a means to obtain services and goods today but divide the cost over an extended period of time. This allows people to afford more expensive items than they would be able to otherwise. Purchasing items like automobiles, homes, education, and home improvements etc. which are purchases that retain value beyond the time it takes to repay the loan are great investments.
Considering this, the responsible use of credit is very important. Guidelines should be established in order to make realistic purchases. A person "living outside their means" is more likely to have poor credit and high debt ratios if they aren't aware of what they can actually afford.
The four types of credit according to Experian:
Revolving credit. With revolving credit, you are given a maximum credit limit, and you can make charges up to that limit. Each month, you carry a balance (or revolve the debt) and make a payment. Most credit cards are a form of revolving credit.
Charge cards. While they often look like revolving credit cards and are used in the same way, charge accounts differ in that you must pay the total balance every month.
Service credit. Your agreements with service providers are all credit arrangements. You receive electricity, cellular phone service, gym membership, etc., with the agreement that you will pay for them each month. Not all service accounts are reported in your credit history.
Installment credit. With installment credit, a creditor loans you a specific amount of money, and you agree to repay the money and interest in regular installments of a fixed amount over a set period of time. Car loans and mortgages are two examples of installment credit.
Good credit can make a huge difference in your financial well-being. In many cases these days, if you have poor credit, you won't even be approved regardless of the interest rate. Another interesting fact you may not have known is that sometimes even landlords and employers use credit scores to narrow down their selections.
Pritchard, Justin. The Everything Improve your Credit Book. Avon, MA: F & W Publications, 2007. Print. Page x.
"The Top Ten Things to Know about Your Credit....
1. Your credit reports may show that you are maxing out your credit cards, even if you pay your cards off in full each month.
2. You have more than one FICO score. Your scores will differ because they are calculated by different credit-reporting companies.
3. Most credit scores sold to consumers online are never used by lenders- the FICO credit score is most often use by lenders.
4. Closing inactive accounts doesn't not help your credit, it lowers your score because it looks like you're using a greater percentage of your total available credit.
5. You may be denied auto insurance because of your credit.
6. Your credit tells companies how likely you are to leave for the competition.
7. You can get at least one free credit report a year from each consumer reporting company.
8. Some actions, like paying down balances and fixing errors, can dramatically improve your credit scores almost instantly.
9. Keep your balances at 35 percent or less of your available credit. Any more than that and lenders will worry that you are about to default.
10. Your FICO credit score is designed to predict how likely you are to be ninety days late paying a creditor within the next two years."