Understanding credit By: Kristen Roussel
What is credit? • Credit is borrowed money that you can use to purchase goods and services when you need them. • Credit can be obtained from a credit grantor whom you agree to pay back the money that you spent at a later date. • It is important for everyone to have good credit. With good credit, you are better able to get loans and buy a house, among other things.
4 Types of credit: • Revolving Credit: • You are given a maximum limit and you are allowed to make charges up to that limit. Every month, you have a balance, or revolve debt, and make a payment towards the balance or debt. Most credit cards are a form of revolving credit. • Charge Cards: • Charge cards look like revolving credit cards and are used the same way. However, you are required to pay the total balance each month. • Service Credit: • Agreements with service providers are credit arrangements. These agreements may include electricity, cell phone service, cable, etc. With these arrangements, comes an agreement to pay the service providers each month. • Installment Credit: • With installment credit, a creditor loans you a specific amount of money, and you agree to repay the money and interest in regular installments of a fixed amount over a set period of time. Two examples of installment credit are car loans and mortgages.
Why do you need credit? • Good credit is necessary if you are interested in using credit to make a major purchase, such as a car or a home. • Good credit is not only important in making major purchases. Your credit information can be used by potential employers and landlords in part of the selection process. • Credit grantors will also review your credit applications and credit reports to determine financial risk. They want to know how responsible you will be in paying them back.
What is a Credit report? • A credit report offers vital information about your credit history. • Your credit report can include: • Identifying Information • Account Information • Inquiries • Public Record Information • Dispute Instructions
Effects of a poor credit report: • Lose a great job offer • Have trouble renting an apartment • Have trouble getting a phone • Be denied loan for a car or home or be required to pay a higher interest rate • Be denied auto or homeowner’s insurance
How often should you check your credit Report? • It is recommended that you check your credit report at least once a year. • A free source in doing so is www.annualcreditreport.com • Avoid other websites for they may allow you to obtain your report for free for a little while, but then may automatically sign you up for services that can cost you near $100.
What is a Credit Score? • Your credit score is a three-digit number that is generated using information in your credit report. • Your credit score is designed to predict risk and the likelihood that you will be serious about your credit obligations in the next year after scoring. • There are many credit-scoring models, but the most common is the FICO credit score. • 90% of all financial institutions in the U.S. use FICO scores in their decision-making processes.
Your FICO score: • You, as a consumer, have three FICO scores, one for each credit report provided by the three major credit bureaus: Equifax, Experian and TransUnion. • FICO scores can range from 300 to 850. The higher your score, the lower risk you are. • A good FICO score can be somewhere around the 760 range. Providers of premium credit cards will most likely not want borrowers with scores below 720.
Sources: • http://www.bankrate.com/finance/credit-cards/what-is-a-credit-score.aspx • http://www.gotcredit.com/what-is-a-credit-report • http://www.experian.com/credit-education/what-is-credit.html