What is Good Credit?
A quick guide to good credit, why you want it, and how to earn it
You’ve probably heard about good and bad credit scores, but what does credit mean, why is it helpful to have, and how do you go about building it?
Credit is a lot like a reputation that you earn over time. When you have a good credit history, it shows banks it’s safe for them to lend you money.
There are two basic types of credit:
- Closed-End Loans, money you borrow then pay back incrementally over a period of time. Loan payments often come with interest payments, which are calculated based on the amount you’ve borrowed. The higher the interest rate, the more you’ll have to pay back in addition to the borrowed amount. We’ll talk more about interest in a bit.
- Credit cards let you make purchases without withdrawing money from your checking or savings account on the spot. Instead, purchases get added to your balance, which can be paid each month. If you decide to keep a balance and pay the money back over time, you will need to make the minimum payment each month and pay interest (which will include interest charged on the borrowed amount) until the borrowed amount is repaid. And like loans, that remaining balance is subject to interest payments until the balance is paid in full.
The Value of a Good Credit Score
In both examples, you can see how higher interest rates can increase the total amount you’ll end up owing. The lower the interest rates, the better—and a good credit score can help you get them.
That’s because credit scores are a factor used to determine interest rates on cards and loans you apply for. The higher your score, the more likely it is you’ll get lower interest rates, which is especially helpful when it comes time for those bigger purchases in life like a car or a home, or borrowing to go to college or start your own business.
How to Build Good Credit
It’s not enough to just be responsible with your spending—you have to show that you can borrow money and pay it back on time. Build credit by opening a credit card and paying your balance in full each month, or get a credit-building loan. Know where you stand and keep an eye on your progress by checking your credit score for free with CreditWiseⓇ from Capital One.
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