Credit. You know you need it, but what exactly is it? At its most basic, credit is money you borrow so that you can purchase goods or services. Credit is most commonly associated with big ticket items like a car or a house. However, there’s more to the credit story than taking out the occasional bank loan. Here’s what you need to know about how credit works and why your credit matters.

First, let’s look at the types of credit available and what each is primarily used for.

• Installment credit – Car loans and mortgages are types of installment credit where you take out a loan for a certain amount of money and pay back that money plus interest in regular installments for a specific period of time.

• Revolving credit – credit cards are a type of revolving credit where you’re granted a certain maximum credit limit, such as $10,000. You can charge any amounts within that limit, making monthly minimum payments but not necessarily paying off the balance in full.

• Charge cards – These are similar to revolving credit cards, except you’re expected to pay the balance in full each month.

• Service credit – This type of credit is associated with services such as gym memberships or cell phone service agreements.

Next, let’s review how a credit score is determined.

As you take out credit, the various creditors gather information about your payment history and report it to the three main credit bureaus (Experian, Equifax, and TransUnion). These bureaus use various scoring models and proprietary formulas to come up with a credit score. Credit scores are typically expressed as a number between 300 and 850. The higher your credit score, the better. For example, a FICO credit score under 630 is considered “poor” whereas anything between 630 and 690 is considered average or “fair.” A “good” credit score ranges from 690 and 720 and an “excellent” one is any score higher than 720. Though the formulas vary from one bureau to the next, the following factors influence all scores:

• Payment history – Do you pay your bills on time? Have you missed payments?

• The length of time you’ve had credit – Are you a new borrower or have you successfully managed credit for decades?

• What type of credit you have – Do you have mostly credit cards or mix of student loans, car loans, and a mortgage?

• Your credit limit – as well as how much of the limit you’ve used.  Have you reached the upper limits of your total credit limit or do you have credit to spare?

• How much debt you have – What is the total amount of debt you currently have?

• Recent credit searches / hard inquiries – When shopping for a loan, lenders will check your credit report, resulting in a “hard inquiry.”

Here is WHY your credit scores are SO Important!

To put things as simply as possible, the higher your score, the more things you will ultimately be able to qualify for in life (i.e. a better home, a cooler car, a dreamier wedding). Not only will a good score get you more of the new things you want, it can also help to lower the bills and interest rates you already have (i.e. your insurance cost could go down or you can enjoy paying less in interest dollars over time).

So WHY is this?

Those with good to excellent scores tend to get the best rates on cars, homes, and personal loans. Their credit histories show that over the years they’ve responsibly managed their credit with on-time payments. Meanwhile, those with low credit scores are riskier thus may get denied or have to pay more in order to qualify. They’ve either just begun to establish credit, and thus are an unknown, or they have a history of late payments, defaults, and other behavior lenders may consider risky. What’s more, other parties, such as employers, insurance companies, and landlords, rely on credit reports as a signal of responsibility. Having an excellent credit score could mean getting that job offer, getting a lower insurance premium, or a more favorable rental agreement.

Is it possible to control your score? YES!

Wanting to take charge of your credit is a great first step. Next, just follow the basics below to get your credit climb started.

• Always pay your bills on time.

• Catch up on any missed payments and stay current.

• Keep revolving credit balances low (aka don’t overcharge or have an i’ll pay it later attitude).

• Don’t apply for lots of new credit cards “just in case.” Instead, be selective and choose the right card to fit your lifestyle.

• If shopping for a loan, make your inquiries within 14 to 45 days of one another, in which case all of those hard credit requests will be lumped together as a single request.

Finally, if you have a bad or low credit score, consider credit coaching . Working with a reputable credit enhancement service like ScoreShuttle can help you strategize score building opportunities, prioritize balance payoffs, and most importantly, professionally dispute derogatory claims listed on your report.

You can control you credit score! Click below to access your report and begin your mission to a higher score today!