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Credit is the key to successful living

Credit remains a mystery — and sometimes a scary subject — for many people.

We know we're likely to need credit at some point in our lives. Most of us have understood from an early age the importance of building and maintaining good credit. But questions linger about what exactly credit means, how to maintain and how to improve it.

As a banker, credit comes into play in discussions and decisions I make with clients nearly every day. I'd like to demystify the concept as well as provide some tips for how to better understand, better use and better maintain credit.

A good place to start is a clear understanding of what credit is and how it works. A simple definition of credit is your reputation for meeting your financial obligations, including your bills and any loans you have taken out.

Your credit score, determined by one of three large national rating agencies — and available at no cost to you for review — is a number between 300 and 850 that ranks your creditworthiness based on a compilation of your financial history. A good rating, generally considered 700 or higher, can help you obtain credit or the ability to borrow funds to make purchases. The most common uses of your credit score are to obtain a credit card or to apply for a loan, often to buy a house or a car.

If the words of your parents or grandparents are ringing in your ears, it's for good reason. Many of us have had the message emphasized to us since youngsters that we would one day need credit and that it was important to ensure we had a good credit score. Our parents and grandparents knew from experience about the daunting experience of seeking credit for one of those big purchases in life.

So how exactly does one go about building and keeping good credit?

First, pay your bills on time. Staying current with utilities, purchases on credit cards and store credit programs is essential to establishing and maintaining good credit. You may not consider your electric bill a form of credit, but it is. The utility company has provided you with service based on the trust that you will pay for what you have used at the end of every month. When you do, you bolster your credit. When you don't, you damage your credit.

A strong credit score generally requires that you do some buying on credit as well. Those who always pay for their purchases on time but do so entirely with cash don't leave much of a credit track record compared with those who purchase responsibly using credit cards.

Bankruptcies, foreclosures and other adverse financial judgments can have the worst impact on your credit. By following the basic tenets of credit — using it wisely and only for items you can afford — consumers can avoid these dangerous traps. Once you fall into one, it can take years to climb out.

What can you do to improve your credit score? In addition to using the credit you have and staying current with payments, you can request an increase in your credit limit. Just make sure you have been able to handle the credit limit you already have. Another avenue in credit-building is credit counseling courses provided by your local bank or credit agencies.

Young people seeking to establish credit or those who want to improve their credit after experiencing problems also can participate in a credit-building loan program, offered at many local banks. These programs allow you to take out a loan, with proceeds placed in an interest-bearing savings account. You make payments on the loan to the bank. When the loan is paid off, you not only have a pot of money in a savings account but also have established a track record of paying off a loan, building your credit.

Credit is an important part of financial life in America. Our parents and grandparents were right when they told us that we would one day need credit and that it was important to build and maintain good credit. Doing this is our responsibility with how we spend and pay our bills, but your local banker is there to help if you have questions or needs.

Steven Raj

Steven Raj is vice president of lending at Park State Bank in Duluth. You can reach him at or (218) 727-8001.