Understanding credit

1. Understanding credit By: Kristen Roussel

2. 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.

3. 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.

4. 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.

5. 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

6. 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

7. 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.

8. 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.

9. 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.

10. What goes into your credit score?

11. 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