Credit 101

Credit is any type of borrowed money. There are various types of credit depending on how you get it and how it's returned. When someone refers to "good credit" they are typically referring to a good credit score. A good credit score is essential for any major purchase you may decide to do in your life time such as a car, home, or a personal loan.

What is a Credit Report?

Your credit report is a compilation of things that would go into your credit score. Your credit reports will show any accounts in your name and your personal information. However between each credit reporting agency your reports may look different.

Experian has an example of what their credit report looks like here. This is a great tool to familiarize yourself on how to read a credit report.

How do I get my credit report?

Thanks to the Federal Trade Commission (FTC) consumers can receive one free copy of your credit report every 12 month from each of the three nationwide credit reporting agencies, Equifax, Experian, and TransUnion. Visit AnnualCreditReport.com to request a copy of your free credit report.

It is vital to check your credit score to make sure everything on your report is accurate and there is no fraudulences in regards to your financial history.

The FTC has a very informative video about your credit report and why you should check it.

What Is a Credit Score?

A credit score is how a lender would determine if they will lend you money. It is considered your "risk factor" or how likely you are to repay the debt. Depending on the credit agency the range for credit scores varies. The average range of credit scores is from 300 to 850, 300 being poor and 850 being excellent. You may obtain your credit score for a fee online.

A good credit score determines your ability to obtain credit and the interest rate you will receive.

A credit report is a summary of your financial information. It will include your personal information as well as anything related to your financial transactions. Every credit agency has their own criteria on what constitutes your credit score rating. The average breakdown is as follows:

A large part of your credit score comes from your payment history and public records. This may include property purchases, liens, bankruptcies, foreclosures, court judgments and divorces. If you were delinquent (late) on any of your accounts or have any recent negative public records this could lower your credit score.

Almost a third of the information factored into your credit score is outstanding debt. This information comes from how much credit you have used in relation to your credit limit. If you are relying too heavily on revolving accounts (borrowed money) it could negatively impact your credit score.

The length of time your accounts are open and how often they are used is considered your credit history. The longer you keep accounts the more they can potentially help your credit score.

Types of credit in use is referring to types of credit accounts (explained below) and what kind of balance you have between these types of credit. Having high amounts of revolving credit can negatively impact your score.
Anytime you apply for more credit or the pursuit of new credit, new accounts can negatively affect your score since there will be more credit inquires which have a negative impact.

Types of Credit Accounts

Credit can be broken down into various types. Each type of credit account has particular traits that distinguish it from others.

Revolving credit is typically seen with credit cards or department store cards. They have no fixed installment amount and the amount of credit you have fluctuates based on use and repayment.

Non- Revolving credit or installment credit are typically things like mortgages, car, or student loans. They have a fixed monthly amount and typically have a specific time period in which it should be paid back. Another trait of installment credit is once the principal is paid off the account is closed and the credit you received is not renewed like a revolving credit.

Secured credit is any type of credit received based on securing it to an asset you own like a home or car. Typically, a secured line of credit is easier to receive because it poses less risk to the lender. If you do not repay your loan they can repossess the asset you used to secure your loan.

Unsecured credit is credit that is not tied to any asset and is typically harder to receive if you do not already have established credit history since there is more risk for the lender.

How Do I Build My Credit?

If you’re starting from scratch there are a few ways to build your credit:

  1. Open a credit card: as a student if you are banking with a financial institution then they typically have a student credit card option. While these might not have the best interest rates and low credit limits they are a great resource when you’re just starting to build credit because they typically have a higher acceptance rate. You can also look into getting a secured credit card. While you do have to pay a deposit for this line of credit it can be useful in order to take the first step into building credit.
    No matter what type of credit card you decide on make sure you do your research on the credit card and know what kind of fees, if any, and interest rates are on the card.
  2. Have a joint account or become and authorized user: If you have the resources and someone to help. Having a combined account or being authorized on someone’s account who has good credit history is helpful to you because the payments made on the account can potentially benefit your own credit score since it shows you are also responsible to payment made to that account.
  3. Pay your loans: making payments on your student or car loans regularly and on time will help boost your credit as well. Showing lenders that you can manage your money will and are responsible in making payment will help raise your credit score.
  4. Get a secure loan: there are specific loans out there meant to help you build credit. These are loans typically with a deposit and are not meant for long term use but long enough for you to build your credit.

Each of these methods will help you build credit but it’s also important to remember good financial habits.

  • You don’t have to carry a balance on a card in order to build your credit.
  • You can use your credit card and pay them off at the end of each month.
  • It’s also important to always make sure you pay your bills on time and to make sure you keep your debt to credit ratio low.
  • It is very easy to charge a credit card and think you pay it off later, but make sure you don’t spend outside of your means!

 

Remember! It’s much easier to harm your credit than it is to rebuild it!