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How to Start Building Credit and Establish Good Financial Habits

Depending on your background, credit may seem like a burden or source of anxiety. There is a variety of opinions on how credit should be handled: some think it is a useful tool while others think it should be avoided at all costs. Whether you’ve been struggling with credit card debt for years or you have finally reached your credit score goal, we want to help you be equipped to understand what credit is and how it can benefit you.

As you consider how your credit has been impacting your financial wellness, it is important that you take the key steps in managing your payments and improving your credit score. If you want further guidance on how to manage your credit, be sure to reach out to one of our financial champions to craft a personalized plan on how you can manage your credit and spending habits. Before you begin crafting a strategy, it’s important that you know what credit is and how it works.

What is Credit and Why Is It Important for My Future?

Credit is simply borrowed money that is expected to be repaid a later time. Since borrowing money can be risky, there is usually a charge for using this money from financial institutions or companies. This charge is called interest, and rates can vary depending on your creditor.

Credit is extremely important for your future for a number of reasons. Before we dive into what you can use your credit for, you need to understand that there are different types of credit:

1. Installment Credit

Installment credit is typically used for larger purchases where you have a set payment schedule. These payments could be monthly, and they are typically established starting from the initial purchase. Examples of installment credit are commonly loans:

  • Car loans
  • Student loans
  • Mortgage

2. Revolving Credit

When you’re accessing a credit card, you’re using revolving credit. Revolving credit is when you are given a line of credit that you can spend as long as you pay it back by a given time. Once you’ve made the payment, your credit goes back to the original amount available for you to spend. For example, let’s say you have a $5,000 credit limit and you spend $3,000. In order to pay back the $3,000 you’ve spent, you can either pay it in full, or you need to meet a minimum payment requirement to pay it back gradually over time. A minimum payment is the smallest amount you need to may on your balance in order to avoid a penalty. Examples of revolving credit include:

  • Credit cards
  • Gas station cards
  • Retail store cards

3. Trade Credit

Another form of credit to consider is for business transactions. If you own your own business, you might want to be aware of trade credit. This type of credit is used solely for professional and commercial purposes, so you can afford to buy equipment or supplies for your business.

4. Service Credit

Service credit is credit you have to cover monthly services, such as utilities for your home. You typically pay off the credit monthly. These services could include:

  • Cable
  • Internet
  • Phone bill
  • Water
  • Electric

As you can see, credit is used for many essential purchases, such as a new vehicle, home, or college. Being able to see the different kinds of credit reveals frivolous ways you might be using your credit and prevent you from over-spending. For example, retail credit cards might not be the wisest choice for your financial well-being because you have multiple payments spread out across different accounts. Having that many could be hard to keep track of, which could be dangerous for managing your credit. While there are some risks with using credit, it can be a useful tool for your financial wellness.

What's the Difference Between a Credit Report and a Credit Score?

Having good credit is like having a good testimony of how well you handle your finances. When you make your car payment on time and with the right amount of money, you are building financial credibility between yourself and a lender. However, if you are consistently late on your payment, that shows a different kind of capability. All your financial decisions with credit are tallied on a credit report. This is a report that includes an overview of your credit history and any current lines of credit, and it is provided by a credit reporting company. Your credit report shows information about your:


This information verifies who you are by noting your name, address, contact information, social security, and birthday.


All your current uses of credit will be included on the report with detailed information about each account, such as how long you’ve had them and their credit limits.

Public Records

If you’ve had any bankruptcies or foreclosures, these will be documented since they have impacted your credit.


Inquiries happen whenever you are applying for some form of credit. Common instances that could cause an inquiry is when you are applying for a mortgage or credit card.


This section of the credit report reveals any mistakes you’ve made in using your credit, such as a late or missed payment.

Credit Score

The part of the credit report you likely are most familiar with is the credit score. Your credit score can range from 300-850, which are categorized from Poor, Fair, Good, Very Good, and Exceptional. A poor credit score is anything under 580, while an exceptional score is anything over 800. Since your credit report takes in all your credit history and current credit, your credit score is an overall summary of how well you’re able to manage your credit and payments. It’s important to note that your score can change often and quickly. If you miss a payment, your score will lower. However, consistently good payments can increase your score. 

At Leaders, we offer Credit Score in our mobile app, which is a robust financial wellness tool to help you keep track of your credit. You can access free credit monitoring and see any fluctuations in your credit score.

All these pieces together are what make up the puzzle of your credit report, which shows how well you’ve handled your finances to lenders. This is incredibly important because the results of your report could determine what products or services you will be able to buy. If a lender has seen a consistent problem with your borrowing history, they may see you as a high risk and undependable. It is crucial that you can manage your credit exceedingly well to prevent yourself from getting into further financial trouble.

What Are Some Easy Ways to Begin Establishing Good Credit?

Whether you’re brand new to using credit or want to build a stronger foundation financially, there are some simple choices you can make to begin the process. An easy first step would be to open a credit card and understanding the process of how to manage payments on a smaller scale. For example, you could use it just for necessary purchases like gas or groceries, so you can become comfortable with handling your payments before you make a more long-term commitment like a car or a mortgage. Since you’re learning how to manage your spending, you can set your credit limit to as little as you want for accountability.

If you’ve had a poor history using credit, you can become an authorized user on someone else’s credit card. Being an authorized user is also a good strategy if it’s your first time using one. As you show how you can manage your payments, you are proving that you are trustworthy to use credit.

Once you’ve been able to practice using credit, you can begin conquering expenses like a mortgage, rent, student loans, or a new car. Something that can help boost your credit score is increasing your credit limit. This can be a step-by-step process, so increase your limit slowly over time to protect yourself from over-spending.

Start Building Credit with Leaders Credit Union

Are you ready to tackle your credit and grow your credit score? We hope the tips we’ve shared with you gives you a clearer picture of the benefits credit can bring you and some things to be mindful of when using it for purchases. At Leaders Credit Union, our financial champions can help you achieve financial peace over how to manage your credit. Be sure to check out our free Beginner’s Guide to Establishing Savings for more ways to champion your financial journey.