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What is Credit? Why Do I Need it?

What is Credit? What types of credit are there? Is credit important? Why do I need it? What do I need credit for? These are all valid questions that we’ve asked ourselves at one point or another, and for good reason.

The term “credit” has many definitions. It could be referred to as public acknowledgment as a participant of a project or production. It could also be referencing a source of pride in which someone or something reflects fondly on another person or organization.

Nowadays, when we talk about credit, we’re mainly discussing credit in the financial realm.

Financial credit describes the money lent or made available under a specified credit arrangement, typically made by a bank or credit agency. In more simplistic terms, credit is borrowed money that someone uses to purchase goods and services when you don’t have the money on your own.

You receive credit from a credit grantor, who of which gives you a specific amount and a timeframe in which to pay back the amount that you spend.

Additional to the amount that you spend, this credit grantor will charge you finance charges or “interest” on the payment. Credit is incredibly useful, especially if you need a large amount of cash that you don’t have at your disposal.

In this simple guide, we’ll cover all of the different types of credit and why credit is essential.

Types of Credit

Revolving Credit

With revolving credit, you are provided with a maximum line of credit. You can make changes up to that limit, but not beyond. Each month, you carry a credit balance and make payments that you can afford, though the full balance of the amount must be paid back at a specific time.

The creditors will give you a minimum payment depending on the financing rates for you to pay back each month. Most credit cards are a form of revolving credit.

Charge Cards

While charge cards are similar in appearance and are used in the same way as revolving credit cards, charge accounts differ. You must pay back the total balance each month to keep up your credit score. If the balance is not paid in full, then penalty fees are added, which can affect your credit score. The more negative items that you get on your credit report, the worse your credit will become.

Installment Credit

When you take out an installment loan, you’re given a set amount of money and a specific timeframe for you to repay it. Interest rates are predetermined and then calculated into set monthly payments or installments. Car loans and home mortgages are two prime examples of installment credit.

Service Credit

Service credit is also known as non-installment loans in which credit agencies loan you money to pay for a service or a membership at a later date. Unpaid balances can result in incurring fees, interest, or penalty charge. If you don’t pay back the balance, then the service or membership will be canceled. People use service credit to pay for electricity, water, gas, and phone bills.

Good Credit vs. Bad Credit

Credit is a reasonably simple concept, though it might not be as easy to practice. Credit has become the guiding force behind our financial lives and reputation. Good credit will prove that you’re financially responsible, while having bad credit may suggest that you’re reckless with your finances.

Credit agencies do not give loans to those with a poor line of credit because they would be taking a more considerable risk of losing money. Those with bad credit have a low credit score because they didn’t pay back their debts on time or at all.

This would cause credit agencies to believe that the person is unfit to pay back a loan and will, therefore, be denied a loan if they applied for one.

Negative items on your credit report will result in a low credit score and, therefore, will pop up a huge red flag to banks and credit agencies.

Luckily for those with bad credit, all hope is not lost. There are ways of improving your credit with the help of credit repair services. The Credit Repair Team offers credit reports and monitoring, along with handy financial tools to help you repair your credit score.

We provide in-depth credit counseling, as well as a free credit report audit and evaluation. Our excellent customer service and support set us apart from other credit repair companies. For your free credit analysis consultation, call The Credit Repair today.


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