Whenever you open a credit card or apply for a loan, credit bureaus collect information about your usage. That information appears on your credit report and is used to calculate a numeric credit score. Your payment history, credit utilization, mix of credit accounts, length of your credit history, applications for new credit all affect your credit and your ability to qualify for financing in the future.
Credit affects many parts of your life, both as a consumer and as a small business owner. Whether you apply for a business loan, make a major purchase, open a cell phone plan, or turn on utilities like water and electricity for your home, your personal credit comes into play. And using credit wisely is essential to having continued access to it in the future.
Unfortunately, since personal finance isn’t taught at most high schools or colleges, the majority of consumers learn the answer to “How does credit work?” from their parents or through trial and error—often only after facing the tough experience of being held back from their dreams and goals because of credit challenges.
Read on to learn all about how credit works, so you can be a smarter consumer and business owner. It’s not just about achieving the perfect credit score. Sure, that’s nice. But it’s more important to understand how different actions affect your credit, so you can better prepare for your business’s financial future.
How Does Credit Work? Personal Credit Basics
How does credit work? If you’re brand new to the idea of credit, let’s start with the very basics. Consumer credit comes into play whenever you borrow money as an individual. The person borrowing is responsible for making payments—and the information about amounts borrowed, as well as the schedule and size of repayments is recorded on that person’s individual credit file.
Consumer debts like car loans, mortgages, and credit cards are the most common types of credit accounts, and creditors in these categories report both positive and negative payment histories to credit bureaus. But those aren’t the only forms of credit that exist.
If you rent an apartment, have a cell phone, or use utilities for your home, those can all be considered credit accounts as well under the latest credit scoring models—the company or creditor in question (think your property management or utilities company) offers you a service and expects you to remit payment after the fact.
You might be wondering where business loans fit in to all this. Even when you borrow money for your business, your personal credit score is very relevant. The reason is that small businesses have high failure rates, so lenders use personal credit score as a proxy to evaluate whether you’re likely to pay back a business loan on time.
how does credit work
Types of Credit
In addition to the different ways that creditors report a borrower’s payment history, there are also two main types of credit accounts, which work a little bit differently in terms of how they process payments and how they’re reported. These are installment credit accounts and revolving credit accounts. Let’s take a closer look at each.
Installment Credit
Imagine that you take out a five-year car loan with 60 monthly payments. When you first open the loan and make your first few payments, your utilization ratio (or your ratio of amount owed to amount paid) will be very high. Closer to the end of the five years, on the other hand, your utilization rate will be much lower because you’ll have made the majority of payments.
A traditional term business loan is a prime example of an installment credit account. It’s closed-ended with specific payment terms, a clearly outlined repayment schedule, and an explicit end date. The utilization ratio on an installment credit contract always decreases incrementally over the life of the loan.
Other examples of installment credit account include car loans, student loans, mortgages, and personal loans.
Revolving Credit
Accounts labeled as revolving credit are probably the ones that you already associate most closely with credit reporting or borrowing funds. A common example of a revolving credit account is a credit card, which offers a set credit limit, minimum monthly payments, and charges interest on any balances carried from month to month.
Another example is a business line of credit. As with a credit card, a line of credit has a fixed credit limit. The lender sets a specific repayment schedule, and when you’ve paid back what you borrowed in full, your available credit goes back up.
Revolving credit offers borrowers a lot of flexibility to spend money now but pay for the purchase when they have the cash available. Of course, that convenience tends to come with a hefty monthly fee in the form of high interest rates.
Types of Borrowers
Not everyone who opens a revolving credit account actually revolves the balance on that account. Creditors typically classify borrowers as either transactors or revolvers, depending on how they go about using their revolving credit lines. This classification has important consequences for your credit.
Transactors
In an ideal scenario, you’d approach every credit relationship with the goal of being a transactor. You have a credit limit on your credit card or line of credit, you spend a certain portion of that limit, and you pay the balance in full each and every month.
The greatest benefit to being a transactor is that, when it comes to credit cards or lines of credit, you never have to worry about hefty interest payments. Because you aren’t carrying a balance month to month, interest charges will never kick in. And equally importantly, operating as a transactor in your credit relationships almost guarantees a positive credit history over time.
Revolvers
Let’s say you have a credit card with a $10,000 limit. If you spend $5,000 toward that limit in one month but only pay back $1,000 of that amount, you’ll be revolving or carrying a balance of $4,000 on that card.
Borrowers who operate as revolvers typically have little, if any, margin in their personal finances. It’s easy to see how—if your spending continues to outpace your payments as in the example above—your levels of debt could skyrocket quickly.
In these scenarios, it only takes one unexpected expense or loss of income to turn a revolving borrower into a delinquent payer.
Sample Credit Report
Find an NCI-Designated Cancer Center
Use the map or list to find centers by area, region, state, or name.
There are many types of cancer treatment. The types of treatment that you have will depend on the type of cancer you have and how advanced it is. Some people with cancer will have only one treatment. But most people have a combination of treatments, such as surgery with chemotherapy and/or radiation therapy. You may also have immunotherapy, targeted therapy, or hormone therapy.
Clinical trials might also be an option for you. Clinical trials are research studies that involve people. Understanding what they are and how they work can help you decide if taking part in a trial is a good option for you.
When you need treatment for cancer, you have a lot to learn and think about. It is normal to feel overwhelmed and confused. But, talking with your doctor and learning all you can about all your treatment options, including clinical trials, can help you make a decision you feel good about. Our Questions to Ask Your Doctor About Treatment may help.
Types of Cancer Treatment
Learn about the different types of cancer treatments, including chemotherapy, radiation therapy, immunotherapy, and targeted therapy.
Side Effects of Cancer Treatment
Find common side effects caused by cancer or cancer treatments. Know what signs and symptoms to call your doctor about, ways to manage these problems, and treatment options.
Clinical Trial Basics
This section contains basic information about clinical trials, including why clinical trials are important, things to think about when deciding to take part, and questions to ask your doctor.
Find NCI-Supported Clinical Trials
Find an NCI-supported clinical trial—and learn how to locate other research studies—that may be right for you or a loved one.
A to Z List of Cancer Drugs
Consumer-friendly information about cancer drugs and drug combinations used to prevent and treat cancer.
Complementary and Alternative Medicine
Healing philosophies, approaches, and therapies used in complementary and alternative medicine (CAM) in cancer care.
Questions to Ask about Your Cancer Treatment
Suggested questions to ask your doctor about treatment choices and the possible side effects of cancer treatment.
Treatment Research
Find research articles on cancer treatment, which may include news stories, clinical trials, blog posts, and descriptions of active studies.
With all the people, paperwork and time-intensive steps involved, getting a mortgage can seem a little like running an obstacle course. But if you take the time to understand the homebuying process and come to it with a strong sense of your own finances, you can hurdle, balance and sprint your way around the course without a scratch.
Here’s how to get a mortgage, step by step (or you can jump to the step you’re currently working on):
Step 1: Get your credit in check
Step 2: Get preapproved for a mortgage
Step 3: Choose the right mortgage
Step 4: Find the right lender
Step 5: Submit your application
Step 6: Begin the underwriting process
Step 7: Prepare for the closing process
Step 8: Close on the home
Borrowing money can help you do things, but the process can be complicated. Mistakes can be expensive, and they can cause your loan request to be rejected. If you need to get a loan, learn what to expect and what you can do ahead of time.
Determine the Type of Loan You Need
The first step is to figure out what you need. The type of loan you get will depend on what you plan to do with the money. Some common loan types include:
Auto loans for buying a vehicle
Home loans (mortgage loans), including second mortgages for buying a home or borrowing against equity in your home
Personal loans, which can be used for almost any purpose
Business loans for starting or expanding your business
Education loans or student loans
In some cases, you won’t have much choice - it’s not likely that anybody will lend you enough to buy a home unless you use a loan designed for that purpose. Using a loan that matches your need will improve your chances of getting approved and will keep your costs low.
Decide Where to Borrow
Shop around. Again, your choices may be limited based on the kind of loan you want: some places don’t offer business loans or student loans. Start your search at the institutions best known for making affordable loans (for example, go through your school’s Student Aid office for an education loan before you go to the bank for a private student loan).
Banks and credit unions are a good place to shop for most loans. Check with several institutions and compare interest rates and costs. Peer-to-peer loans and other sources of marketplace lending should also be on your list. There are also several websites with access to multiple lenders. Borrowing online is perfectly safe as long as you stick to reputable sites.
Some people borrow from private lenders such as friends or family. While that can make approval easier and keep costs low, it can also cause problems. Make sure you put everything in writing so everybody’s on the same page - money can ruin relationships, even if the dollar amounts are small.
Avoid high-cost loans and predatory lenders. It’s tempting to take whatever you can get when you’ve been turned down repeatedly and don’t know how else to get a loan. However, it’s not worth it—they’ll lend you money, but you’ll find yourself in a hole that’s difficult or impossible to get out of. Payday loans and rent-to-own programs tend to be the most expensive options, and loan sharks can be outright dangerous.
Lawyers can act as legal defense representing clients in civil or criminal proceedings, as attorneys for a plaintiff in civil proceedings, or as prosecutors representing the government in criminal proceedings. They may initiate lawsuits, represent private citizens, corporations, or the government, or serve in advisory positions. Lawyers may legally practice after completing a Juris Doctor (JD) degree, which is a professional doctorate, and successfully passing the bar exam in the state(s) in which they want to work. Attorneys often forge their own career paths. In addition to practicing law, seasoned attorneys may teach at colleges or universities, become corporate executives, or enter politics. In fact, numerous presidents – including Barack Obama, Bill Clinton, and Franklin Roosevelt – were all attorneys prior to becoming politicians. Experienced lawyers may also go on to run to become a judge. Lawyers may be employed by the government, private law firms, businesses, and non-profit organizations.
Career Description, Duties, and Common Tasks
Lawyers generally perform actions on behalf of clients in court, advising them as to the proper course of action in civil and criminal activities. Attorneys tend to specialize in one aspect of the law, such as product liability, criminal justice, family law, or elder law. They may also advise companies on the validity of contracts and mergers or other aspects of corporate governance. Unlike many criminal justice careers, lawyers spend the majority of their time in offices or in the courtroom. Aspiring attorneys must have strong critical thinking and public speaking skills as well as research abilities.
Steps for Becoming a Lawyer
A Juris Doctor, or JD, which is a doctoral degree, typically takes three years and is required to become a lawyer. Most law schools require a bachelor's degree for admission, but many do not require a specific major. While political science, pre-law, and liberal arts degrees are all common choices for aspiring law students, they are not required. Prospective law students must take – and earn acceptable scores on – the Law School Admission Test, most commonly referred to as the LSAT. Once a prospective lawyer has earned a JD, he or she must pass the bar exam of the state(s) in which they wish to practice.
If you are interested in becoming a lawyer, you should:
Earn a bachelor's degree in any subject.
Take and pass the Law School Admission Test (LSAT).
Attend law school and acquire a Juris Doctor (JD).
Complete a clerkship at a local law firm to gain experience (optional).
Take and pass your state Bar Examination.
Apply to become a lawyer at an established law firm (or start a private practice).
Be interviewed.
Get hired as a lawyer.
Lawyer Job Training
Aspiring lawyers generally begin their hands-on law training in law school. Law school clinics, which are usually non-profit organizations, allow students to gain real-world experience while working with seasoned lawyers. Students have the opportunity to advise clients under supervision, draft motions, present motions, communicate with the opposing counsel, and investigate cases. Graduates may also gain experience by offering their services pro bono. New attorneys generally join law firms and must work their way up through the ranks of the law practice or business for which they work. Some law firms also provide training for new attorneys. What that training entails depends on the individual law firm. Finally, some states require new attorneys to complete state-required training. For example, all new lawyers in Ohio must successfully complete seminars to fulfill their New Lawyer Training (NLT) requirements.
Other Helpful Skills and Experience
Prospective attorneys should have strong communication skills (both oral and written) and should feel comfortable with public speaking. Lawyers often work with a diverse clientele and should possess the patience and empathy necessary when working with clients who may be in stressful, emotional situations. Attorneys with previous law experience, including working for law clinics or non-profits, will generally have a hiring advantage.
Examples of Possible Job Titles for This Career
Attorney
Counsel
Esquire
Lawyer Salary and Job Outlook
The median salary for lawyers in the United States is $119,250 per year according to the Bureau of Labor Statistics (BLS).1 However, salary varies widely based on whether an attorney is working in private industry or in the government sector. Top-earning lawyers in the federal government, for example, make an annual average wage of $141,900, while those working in state government make an annual average wage of $85,260.1 The BLS projects job growth for lawyers to be about 8% from 2016 to 2026.1
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