By now, you’ve likely encountered credit in some form, whether through a student loan or a credit card used for emergencies or everyday expenses. Credit generally falls into two categories: installment loans and revolving credit.
Installment Loans
These are loans taken out for a specific purpose and paid back in fixed, scheduled payments over time. Common examples include student loans, auto loans, mortgages, and personal loans.
Revolving Credit
Revolving credit provides a flexible line of credit that you can borrow from repeatedly, as long as you stay within your credit limit and make at least the minimum required payments. This type of credit is commonly offered through credit cards, such as Visa or Mastercard, and store-specific credit cards.
Both types of credit have their benefits. They allow you to handle larger expenses while also building your credit history. Responsible use of credit—such as paying on time—can help improve your credit score (commonly referred to as a FICO score). A strong credit score signals to lenders that you are a low-risk borrower, which can positively affect your ability to secure loans and favorable interest rates in the future. On the flip side, missing payments or overextending your credit can hurt your score and make borrowing more difficult down the road.
There are three major credit reporting agencies, or credit bureaus, that track your credit and financial history: TransUnion, Experian, and Equifax. Your credit report is a detailed record of your financial activity, including loans, credit cards, and payment history. You are entitled to one free credit report annually from each of these agencies through AnnualCreditReport.com. However, if you want to access your FICO credit score, there may be additional costs involved.