Understanding Credit and Building a Framework for Disciplined Personal Finances



What is credit? Credit, simply put, is making a purchase today with the promise to pay for it tomorrow. Typically, this involves establishing a relationship between a business and consumer based on financial trustworthiness and measure of risk. Typically, this depends on the 5 C’s of credit: character, capacity, capital, collateral, and conditions.

Credit can take many forms, all categorized under one of three types: revolving, installment, and open accounts. These vary based on length of term (long or short), type of payment (fixed or variable, and the amount due each month (full balance or minimum required payment).  Credit plays a role in our lives in many ways. Your credit cards are a form of credit. Your car loan, home mortgage, home equity lines of credit, or other types of institutional loans are forms of credit. Even your bar tab could be considered a form of credit.

Now that you understand what credit is, how do you make the best use of it? Good spending and payment habits are essential in managing your personal finances regarding lines of credit. The first thing you must do, if not doing so already, is to create a budget. This is essential in understanding your income and spending levels. Once you have this in place, you can understand where you need to deploy credit, and where you need to tighten up in order to avoid bad financial situations such as delinquencies, collections and more.

Try to avoid the temptation to spend just because you have a line of credit. It is easy to splurge when there is no immediate obligation to pay in cash. Also, other aspects of credit to keep in mind are interest rates, transfer fees, annual fees, etc.  Avoid higher interest credit lines when possible, and if not, always work to try to move these away from higher interest rate lines to lower rate lines.

The following are tips you can use to manage various lines of credit efficiently.

Credit Cards – Revolving accounts

The best way to use a credit card is by using it only when you need it, and by charging only what you know you can comfortably afford to pay back. When used properly, credit cards offer a convenient way to pay for day-to-day expenses. They can also help you build credit, earn rewards, pay off debt or finance a purchase you can pay off over time. But be careful! A credit card could also lead to high interest charges, increasing debt and placing a ding to your credit score. Here are some good habits to follow:

  • Pay your bill in full every month.
  • Never pay your bill late.
  • Log into your account and always keep aware of your balances.
  • Use your credit card as a compliment to your budget.
  • Know your limits.
  • Only use your card for the big stuff.
  • Take advantage of all the rewards you can.
  • Choose cards with extra perks.

Home, Auto, and Personal Loans – Installment accounts

The best way to use these is to help improve your finances. That’s why debt consolidation — which can help you get rid of debt faster — and home improvement projects — which can boost the value of your home — are popular reasons people utilize loans. Here are a few responsible uses:

  • Use to consolidate existing debts
  • Refinance existing loans
  • Cover home improvement projects
  • Pay medical bills
  • Pay for special occasions – weddings, vacations, and other discretionary expenses
  • Cover emergencies

Utilities, Cell phone contracts, etc. – Open accounts

These typically have a balance that must be paid in full each month. These do not usually charge interest. In most cases, these also do not appear on credit reports unless the company reports late payments.


There are good ways to use credit, and bad ways to use credit. A lot of it depends on you. As you can see, you have to actively manage your credit. Yet many lack the basic financial knowledge or discipline to do so, and often end up in large amounts of debt which may feel insurmountable. Remember, these are the good and bad uses of credit:

Good Uses of Credit

  • Build up your credit score
  • Emergencies
  • Debt Consolidation
  • Secure online shopping
  • Tracking family spending
  • Turning a credit card into a low-interest loan
  • Use a loan to make a big, necessary purchase
  • Use for safety to avoid carrying around large sums of money
  • Use for convenience
  • Earn rewards or cash back
  • Take advantage of 0% APR offers
  • Take advantage of tax breaks

Bad Uses of Credit

  • Using credit to extend your income
  • Making small, spur-of-the-moment or impulse purchases
  • Gambling
  • Having too many credit cards
  • Using a credit card for a major purchase
  • Letting others use your credit cards
  • Going on vacation
  • Using a credit card for tuition
  • Signing up for the first offer that comes your way

While you shouldn’t fear credit, you do need to be responsible with it. Make sure to have a budget to follow, spend within your means, and use credit wisely.  If you do so, you’ll ensure continued financial freedom and avoid delinquencies, collections and other negative consequences of severe personal debt.



Ready to take control of your credit? CINCB can help. Get your credit report and rating today from CINCB! Want to check your credit report right now? You can easily and securely order your credit report online, with quick turnaround (usually 24 hours or less). You can get your credit report here – Get My Credit Report.

CINCB has been established since 2002 to provide debt collection and credit reporting services. CINCB serves over 260 creditors locally and internationally with a local team of highly experienced agents ready to serve you.  Services are delivered fully online at www.CINCB.ky.  Contact us today to find out more.

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