The In’s and Out’s of Credit

What is credit, why do I need it, and how do I get it?

In recent SquareOne Financial Foundations blogs, we reviewed topics focused on saving for emergencies and retirement, but now let’s shift gears and dig into one of the most critical yet most misunderstood components of your financial life—credit.

What is credit anyway?

Simply put, credit is one’s capacity to borrow money or gain access to goods and services with the understanding that you will pay later. It’s made up of payment history, length of credit history, new credit, amounts owed, and type of credit used. There are four types of credit:

Revolving credit

Borrowers are given a maximum dollar amount to borrow and must make a minimum payment each month, up to the total amount borrowed in each period, usually a month. If you don’t pay the entire amount borrowed, you carry forward the remaining debt to the next month. Credit cards are the most common form of revolving credit.

Charge cards

Like credit cards, borrowers are given a maximum amount of availability to borrow each month, but you must pay off the balance in full every month. Charge cards are less common than revolving credit cards.

Service credit

Utility companies and cellular providers use the service credit model. Users pay for services provided by companies after the fact.

Installment credit

Installment credit is a loan for a specific dollar amount that you agree to repay plus interest in a series of equal monthly payments. Installment credit includes car loans and mortgages.

So why do you need credit?

Is it possible to pay for everything in cash and never borrow money? Unfortunately, it’s not that simple. Both your credit report and score are reviewed by landlords and leasing agents if you’re renting, by insurance companies when determining rates for your home and auto insurance, and even employers when making hiring decisions. Establishing and maintaining a good credit history is essential for being purposeful with your finances and working toward financial stability and independence.

If you are short on credit or don’t have any credit history, here are a few easy ways to establish credit and begin improving your credit score:

Secured credit card

A secured credit card is backed by a cash deposit you make upfront and is usually the same as your credit limits. Like any other credit card, you will use the card by purchasing items, services, or paying bills. The key is to make a payment for the balance (in full) on or before the due date to avoid interest charges and establish a good payment history.

    • TIP: Pick a bill you pay every month, like your internet, cell phone, or water bill, and instead of paying your provider directly with cash or check, set up an autopay on the secured card. Be sure to pay off the balance on your secured credit card each month to avoid interest charges. Consistent payments on the card will show responsible use of credit over time and help build your track record of using credit responsibly.

Secured cards are not meant to be used forever but are intended to build enough credit history to qualify for a traditional credit card.

Credit Builder Product or Secured Loan

These products function as a form of a forced savings program. The service program will report your monthly payments to the credit bureaus to help boost your credit history.

Use of a Co-Signer

Co-signing a loan or credit card is a widespread practice, but your co-signer needs to understand the risk they are taking. Co-signers on any debt are equally responsible for paying the debt back, so this is not a decision to be made lightly.

Authorized User

Suppose you have a parent, family member, or significant other willing to add you as an authorized signer on their credit card, and they have a good credit history. In that case, the association can help you build your credit. Adding you as an authorized user adds that card’s payment history to your credit file. A bonus for the individual adding you as an authorized user is that you do not need access to the card to see the benefits. However, you’ll want to make sure that the card issuer reports authorized user activities to credit bureaus.

Now that you have some tools to help you start building credit history, we’ll focus on how your credit score is calculated and more tips for using credit responsibly in the next SquareOne blog.


SquareOne: A Financial Foundations Blog is a personal finance series from The Welch Group created to help provide readers with the foundational knowledge to be purposeful with money by identifying key financial concepts to help them control their financial future. Foundation topics include personal savings strategies, debt consolidation and reduction, life planning, retirement planning methods, and beginner essentials of investing and taxes.


certified financial planner Callie Jowers wears maroon and gold zipper dress with hands clasped together, posing for professional photo in an office

 Callie Jowers, CFP ®, is an Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Callie is a graduate of the University of Alabama, is currently pursuing a Master of Accounting at the University of Alabama at Birmingham, and is a Certified Financial PlannerTM.



Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. There can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Welch Group, LLC -“Welch”), or any non-investment related content, referred to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Welch. Please remember that if you are a Welch client, it remains your responsibility to advise Welch, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Welch is neither a law firm nor a certified public accounting firm, and no portion of the blog content should be construed as legal or accounting advice. A copy of Welch’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Welch does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Welch’s website or blog or incorporated herein, and takes no responsibility.