You might read articles or hear lots of advice about the problems that come with using credit, but using credit wisely can offer a variety of helpful benefits. Even if you can afford to pay cash for something, paying with credit can help you build a good history that will help you later when you need to take out a loan or obtain other types of credit.
One measure of your credit score is the amount of revolving credit you have and use. An example of revolving credit is a credit card. Your balance goes up and down as you make charges and then pay off the debt. You might be able to start building credit using a gas or store charge card. Even if you can pay for gas with cash, by using your card and paying your balance each month, you can establish credit use history. A good way to improve your use of revolving credit is to keep your ratio of debt to available credit lower than 25 percent. You will lower your credit score if you max out your cards or use most of your available credit. This will make it more difficult to get other types of credit later.
One of the things lenders look at when evaluating your creditworthiness is whether you have installment accounts and how you’ve managed them. These are loans or purchases that require you to make the same payment each month. For example, if you charge a $1,200 personal computer to your credit card, you can stretch paying off that amount for years with revolving credit, paying only the minimum payment on your total card balance each month. If you buy the computer on installment, you might pay $100 per month for 12 months. Other examples of installment credit include an auto or student loan.
Investing With Credit
An old business saying goes, “You need to spend money to make money.” In some cases, using credit to improve something you own can help you sell it for more later. For example, if you have a car that’s worth $3,000 because it needs engine or bodywork or new tires, using credit can help you fix the car and sell it for more. You might use your credit card to buy $300 worth of new tires and another $200 to fix a dent, for example; you might then be able to sell the car for $4,000, increasing your take by $500.
Taking out a college loan to pay for a degree that will help you land a good job is another example of sound credit use. Visit the website of the U.S. Bureau of Labor Statistics to research jobs you might like to pursue after college to see what they pay and how likely it is you’ll get a job. If you take out $80,000 in student loans, and plan to enter a field that pays only $40,000 per year and has declining demand, you may find yourself spending years paying down the loan while living on a tight budget. For this reason, it's important to consider the amount and type of the loan you'll take to pay for a certain degree and then determine how comfortably you'll be able to pay back that loan from future earnings.
- ScoreInfo: FICO Score Factors Guide
- Bankrate: Best Ways to Establish Credit
- Fair Isaac Corporation. "Credit Checks: What Are Credit Inquiries and How Do They Affect Your FICO Score?" Accessed June 19, 2020.
- Experian. "Collections on Your Credit Report." Accessed June 19, 2020.
- Experian. "What Is a Credit Utilization Rate?" Accessed June 19, 2020.
- Experian. "When Are Closed Accounts Deleted?" Accessed June 19, 2020.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.