Understanding credit: Master the basics and develop smart habits

When it comes to financing new cars, securing mortgages, and managing unexpected expenses, credit can be very useful. Credit helps you get what you need, when you need it – and that's convenient.

However, it's important to take a responsible approach to credit management. To put it into perspective, overall U.S. household debt has increased 11% in the past decade, according to NerdWallet. Today, the average American household is saddled with about $16,425 of credit card debt. And that number spikes to $135,924 when you factor in an average mortgage.

Credit, when used responsibly, is a reliable financial resource. The key is to understand what credit is, how to manage it, and how to establish and maintain good credit.

Understand credit and how it's used

Credit is borrowed money that you can use to purchase goods and services without cash up front. You apply for a credit line and, if approved, receive credit from a credit grantor (think bank or financial institution). Then you're responsible for paying the balance, usually in monthly installments, for the duration of the loan.

Nail the basics of responsible credit management

• Keep your total balance owed as low as possible – and pay your bill on time, every time. Whether it's one credit card or five, keeping a low balance with a history of on-time payments will boost your overall credit score. Owing money on a credit card doesn't automatically make you a high-risk borrower, but using a high percentage of your available credit could signal that you're overextended and more likely to miss payments.
• Prioritize and pay off the most expensive debt first. Commit to paying down the most expensive debts first. Credit cards or loans with the highest interest rates get top billing. Pay more than the minimum payment to start chipping away at the total balance – otherwise you're just covering the interest rates and treading water.
• Find out your credit score and monitor it closely. Your credit report reflects your financial health. And your credit score is a direct reflection of your risk as a borrower. If your credit score is good (700 or higher), it shows a proven track record of responsible debt management. And that means lower interest rate loans. Take stock of where you stand now and aim to boost that score with on-time payments.

Reap the benefits of maintaining a good credit profile

When you have a strong credit profile, you'll have access to more borrowing options at lower interest rates. Plus, potential employers, landlords and insurance companies often reference your credit history when determining your candidacy for jobs, rental agreements and premiums. A high credit score and a solid track record of on-time payments will position you for better opportunities down the road.

For more tips and advice, check out Comenity's financial education resources.

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