Understanding Credit
What is credit?
Credit is the ability of a consumer to purchase goods or services before payment, with the belief that payment will be made later. Most often, borrowing is charged in the form of interest and fees.
Establishing Good Credit
Good credit scores can have a positive impact on many aspects of your life. They may affect your ability to buy or rent a home, your job prospects, and your access to loans and other financial services.
What is considered a good credit score?
The credit score is between 300 and 850. Lower scores indicate a higher credit risk. Credit scores are generally good if they range from 690-850. 850 is an excellent score.
Here’s how to establish good credit.
- Open a savings and checking account.
- Pay your bills on time.
- Repay outstanding balances
- Check your credit report annually
- Protect your identity
The Five Components that Make Up a Credit Score
- Payment History (35%)
- The ratio of debt to available credit (30%)
- Length (15%) of credit history
- Types of credit used (10%)
- Recent Credit Searches (10%)
Tip: Visit the Federal Reserve for more useful guides on improving your credit score.
Check Your Credit Report
Credit reports contain your data, your credit history, the inquiries that companies have made to see your credit information, and much more. By checking your credit report regularly, you can prevent any inaccuracies in your credit data that could lead to a low credit score and a denial of credit or loans.
Tip: Check the accuracy of your credit report by checking the names, addresses, birthdates, Social Security numbers, and accounts.
Where can you access your credit report?
Three nationwide credit reporting agencies will give you a free report on your credit history upon request and once a year. These three agencies include:
- Equifax
- Experian
- TransUnion
To request a free credit report from any of these agencies, visit annualcreditreport.com or call 1-877-322-8228.
Tip: Spread out your credit reports every few months instead of checking them all at once. This will allow you to monitor your credit for free throughout the entire year.
What is a credit card?
Credit cards are a way to borrow money, but they come with interest and fees. A credit card is a revolving account, which means you can borrow money repeatedly on one account until a certain limit. Consider the pros and cons of a credit card before applying.
Benefits
- Use in emergencies
- Purchase now and pay later
- Buy protection
- If used correctly, it can help establish good credit.
Disadvantages
- Overuse
- Interest rates/annual fees
- Increase your debt
- If not used correctly, it can lead to poor credit.
Keep your credit card in control.
- Only use one credit card.
- Choose the best credit cards.
- Consider a secured credit card. This is a credit card type that requires you to deposit cash as collateral. This deposit will then determine the credit limit for the account.
- It would help if you didn’t charge for anything that you cannot afford
- Your monthly bill must be paid in full.
Credit Card Warning Signs
You can easily miss a due date for payment or accumulate an excessive amount of debt without realizing it, which will leave you in sour relations with your credit card provider. Track your bills and expenses, and be on the lookout for signs of excessive credit use. You can do this by paying one credit card off with another or making only the minimum payment.
Alternatives to Credit Cards
Cash, debit or secured card, a prepaid card, or a loan are all convenient options if you’re unsure about getting a card or wish to change your credit usage.
How to Get a Credit Card
When reading a credit offer, there are several important factors to consider. Each credit card issuer is required to provide the fine print in a Schumer Box. The Schumer box is a standardized way to gather all the information needed to compare credit cards. Each Schumer box includes:
Charges
Credit cards have a variety of fees, just like other bank cards. Late fees are usually charged for non-payment of minimum payments, and fees are also set for exceeding the credit limit.
Interest Rate
The rate that credit card companies charge for the use of their cards. Rates vary from 6% up to 36% depending on the institution and borrower’s history. If you pay off the full balance of your credit card each month and don’t carry any balance from month to month, then there will be no interest charged.
APR
APR is a sum that a credit card provider offers as the price of borrowing. The APR is calculated annually and cannot be changed during the first year unless there is a promotional rate or variable rate.
