What credit is and how it works

When a lender gives you credit, it trusts you to pay back what you borrow, usually with interest. Interest is the price of borrowing. The longer you take to repay, and the higher the rate, the more you pay in total.

Two main types of credit

• Revolving credit, like a credit card, gives you a limit you can use, repay and use again. The balance and payment change month to month.
• Installment credit, like a car loan, student loan or mortgage, is a set amount repaid in regular payments over a fixed time.

Why your credit history matters

Lenders, landlords, some employers and insurers may look at your credit history to judge how reliably you handle obligations. A history of on-time payments can mean easier approvals and lower interest rates. Late payments and high balances can mean denials or higher costs.

Building credit takes time. Common first steps include becoming an authorized user on a responsible family member's card, a secured credit card (backed by a deposit you make), or a credit-builder loan from a bank or credit union. You generally must be 18 to have your own credit card, and under 21 you need your own income or a co-signer, so being an authorized user is often the first step. Whatever you choose, the habit that matters most is paying on time, every time.