What Credit Means for Your Financial Future

Recent data from TransUnion shows that Gen Z Filipinos are rapidly entering the credit market, with the share of new credit cards more than doubling since 2019. There’s no better time to learn about what credit is and break down its role in your financial future.

What is credit?

Credit is essentially the ability to borrow money or access goods and services with the promise to pay later. When you use a credit card, take out a loan, or buy something in installments, you’re using credit. It’s a powerful tool that can help you build a strong financial foundation, but it needs to be used wisely.

How does credit work?

Think of credit as a trust system in the financial world. Here’s a simple breakdown:

• Borrowing: You borrow money or make a purchase with the agreement to pay it back later.
• Terms: The lender sets terms, including how much you can borrow, the interest rate, and the repayment schedule.
• Repayment: You pay back the borrowed amount, usually with interest, over time.
• Credit history: Your borrowing and repayment behavior is recorded, forming your credit history.
• Credit score: Based on your credit history, you’re assigned a credit score—a number that represents your creditworthiness. Learn more about how to build a good credit score in the Philippines through this article: Credit 101: How to build good credit.

Types of credit

Credit comes in various forms, each serving a different purpose:

• Revolving credit: The type of credit that you can repeatedly borrow up to a certain limit and pay back over time. This includes credit cards and lines of credit.
• Installment credit: These are loans for a specific amount that you repay in fixed installments, like personal and SME/business loans, or home and car mortgages.
• Service credit: This involves contracts with service providers, like your cell phone or utilities, where you use the service before paying for it.
• Merchant credit: When stores allow you to buy now and pay later, that’s merchant credit.

Why is credit important?

Understanding and managing credit is crucial for several reasons:

• Financial flexibility: Credit allows you to make large purchases and spread out payments based on the agreed terms.
• Access to funds: A credit card can provide immediate access to funds when an unexpected expense arises.
• Building a credit history: A good credit history can help you qualify for better loan terms in the future.

Managing your credit wisely

Once you have credit, managing it well is key. Here are a few tips:

DOs

• Pay in full and on time: Always make your payments by the due date to avoid late fees and negative marks on your credit report.
• Keep balances low: Aim to use less than 30% of your credit limit. Consistently using a high percentage of your credit limit can negatively impact your score.
• Monitor your credit report: Understand how credit scores work and regularly check your credit report for errors or signs of fraud. You can get a copy of your credit report annually from the credit bureaus.

DON’Ts

• Miss payments: Missing payments can significantly damage your credit score.
• Overapply for credit: Each credit application can temporarily lower your score.
• Ignore your statements: Review your credit card and loan statements to catch any discrepancies early.

Good credit is key

When used correctly, credit can help in achieving your goals. It’s worth investing time and effort into building and maintaining a good credit profile—especially while you’re still young. With knowledge and responsible habits, you’re all set to write your own credit success story. After all, in the game of adulting, a good credit score might just be your secret weapon.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Financial decisions should be based on your own research and personal circumstances. Consider consulting with a qualified professional before making any financial decisions.

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