Making Dollars and Sense of Credit
Making Dollars and Sense of Credit
Your credit is a vital part of your financial health. Understanding why credit is so important, and what steps you can take to maintain good credit, helps you make better choices about your personal finance. Good credit also gives you more options for making the most of your money.
And just like with your physical health, credit decisions you make now can have consequences you won’t feel until much later. Here’s a look at how credit impacts your life:
What is credit?
Most simply, credit is an agreement between a lender and a borrower. It is the trust that allows money to be provided without immediate reimbursement, and it can be packaged as either a credit card or a loan.
Both credit cards and loans come with specific repayment terms, and perhaps the most important of these is the interest rate. The APR (Annual Percentage Rate) translates to the additional amount you’ll be charged depending on how long it takes you to pay back your balance. A lower APR is better, but always check the terms to make sure a low rate isn’t just a promotional offer that increases after a temporary period.
Credit is typically issued on a revolving basis or in installments. A revolving credit line, like a credit card, comes with a credit limit for the maximum amount you can owe at any time. You are required to make the minimum payment by the due date each month.
Credit installment loans, like a car loan, refer to one-time loans for a set amount. Your payments are for a specific amount each month, which includes interest, fees, and other charges. Once you’ve paid off the installment loan, your account is closed.
What is credit history?
Credit history is the record of how you manage and repay debts. It includes your total debt load, the number of credit lines that have been opened, and timeliness of payments. Lenders look at credit history when deciding whether or not to offer a new line of credit, and to help set the terms of a loan.
What is a credit score?
Your credit score is a reflection of your credit history expressed as a number — one that indicates to lenders your creditworthiness. Essentially like a grade, your credit score is used to assess the likelihood that you will repay the money you borrow.
Credit scores can range from 300 to 850. The higher the score, the “more trustworthy” a borrower is considered. Credit scoring generally falls into the following ranges, according to FICO®, the leading credit scoring company:
- Exceptional: 800+
- Very Good: 740-799
- Good: 670-739
- Fair: 580-669
- Poor: lower than 580
As you build your credit history, your credit score increases or decreases based on your activity in applying for credit, using your credit, and making payments.
Lenders use slightly different credit scores for different types of loans. You can find out your credit score from multiple sources, including from a credit card or other loan statements, from a non-profit credit counselor, or for a fee from a credit reporting agency. AnnualCreditReport.com is a government-authorized site for free credit reports where you can get started with your credit score research.
How is my credit measured?
Among the considerations that determine your credit score are:
- Your bill-paying history, including how many credit accounts you’ve consistently paid on time. (An easy way to make sure your bills are always paid on time is to set up automatic payments through your online banking service.)
- How many loans or credit accounts you have.
- How long your credit accounts have been open.
- How much credit you are using vs. how much you have available.
- Whether any of the credit accounts you hold are currently 30 or more days behind on payment, and how many days past due you are.
- Whether or not you have ever declared bankruptcy or been sent to collections.
- Your outstanding debt.
What is a credit report?
A credit report is a summary of your credit history. Lenders, including banks and nonbanking financial institutions, provide information to credit bureaus. This information is then compiled into a single report that gives a detailed breakdown of how and when you pay your bills, how much debt you have, and how long you have been managing credit accounts.
Credit reports are used to verify your identity as well as to calculate your credit scores.
Why is credit important?
Credit scores are the primary consideration used by banks and lenders when issuing credit cards and loans. Having a higher score gives the lender confidence that you will pay off your debt, and also influences the interest rate or down payment required on some loans.
If you have a high credit score and are deemed trustworthy, the interest rate or down payment is more likely to be more favorable for you. Other benefits follow, like increases in your credit limit or in your negotiating power for other lending situations.
How do I establish and maintain credit?
There are several simple ways to start building your credit history, including:
- Opening a credit account with a local store (although first make sure that your payment history will actually be reported to a credit bureau).
- Applying for a secured credit card, which typically requires you to provide funds for a balance first, before letting you borrow a percentage of that balance.
- Asking someone with more established credit history to co-sign on an account with you, to give the lender assurance that your debt will be paid. Understand that this means your co-signer is ultimately responsible for making payments on the account if you cannot.
Once you have established a strong credit profile, you can stay in good standing by:
- Making payments on time, every time.
- Avoiding making charges too close to the credit limit of your revolving accounts.
- Being mindful about formally closing accounts, which can impact your credit score depending on the specifics of your relationship with these credit accounts.
- Avoiding frequent credit application. Know that every time you apply for credit, it is reported on your credit report as an inquiry, and that multiple inquiries over a short span of time can negatively affect your credit score.
How do I protect myself while using credit?
While good credit is an important tool and resource, it’s important to stay aware of potential risks and fraud. Some tips for managing credit carefully include:
- Don’t lend out your credit cards.
- Be careful when and where you identify your account numbers, whether it’s digital, in person, or written down.
- Carry only the credit cards you need to prevent loss or identity theft.
- Always report lost or stolen cards as quickly as possible.
Remember that, as part of the United Bank community, you’re not alone in trying to understand and plan your best budgeting choices. We’re here to help you with making credit decisions that will create growing financial opportunities now and in the future.