Your credit history

You're probably clear about why it's smart to use credit wisely in the short run: It keeps your spending in check. But the long-term benefits of careful credit use include an increased ability to borrow at a reasonable cost — which can help you achieve more of your financial goals.

Using credit responsibly helps improve your credit history, or the record of how you use the credit you have. Since granting credit is based on trust — specifically a lender's belief that you will pay back the money you borrow — lenders take some risk when they offer you a credit card, a loan or a mortgage. To reduce risk, lenders analyze your past borrowing behavior using a credit report, or document that outlines your credit history, and is the basis of your credit score.

What's in a credit report?

Your credit report contains personal information like your address and employer, a record of your recent requests for credit, and any public records such as bankruptcy or tax liens. It also contains information about every credit account you've opened, the credit limit for a revolving line of credit or total amount of a loan, whether you made monthly payments on time, and whether any portion of what you borrowed wasn't paid back.

Late payments or high outstanding balances relative to your total credit limits are warning signs that you might not be the best credit risk to a lender or other companies that review credit reports. That means you may be denied new credit, or have to pay a higher interest rate for what you borrow, to offset the added risk.