Credit

• What Is Credit?
• Why Do I Need Good Credit?
  
• What Is a Credit Report?
  
• What Is a Credit Score? How Do I Keep a Good One?
  

What Is Credit?

The short answer is credit is money that you borrow from a creditor (such as a bank or credit company) that you agree to pay back.  Normally part of the repayment includes additional charges (interest) on the amount you borrowed, and often you must meet minimum payment criteria and make payments within a certain timeframe.

There are four types of credit:

1. Revolving credit: This is the one you probably associate most with 'credit.' You are given a credit limit, and you can continually make charges until you hit that limit. Each month you make a payment toward the balance, and the balance continues to move forward - with interest added - until the entire balance is paid off. Example: credit cards.
   
2. Charge cards: Similar to credit cards, but the full balance must be paid each month.
3. Installment credit: You borrow a set amount of money, and you agree to repay it (in installments) with interest over a certain period of time. This is different from revolving credit because you can't keep making additional purchases up to a limit. You borrow the full amount and pay it back. Examples: loans such as car loans and mortgages.
   
4. Service credit: When you agree to pay someone for a service they provide, that is credit.  Some examples are your cell phone service, cable, electricity, and gym memberships. Keep in mind not all service providers report to your credit history, but some do!

Why Do I Need Good Credit?

Your credit can impact a lot of things - such as your ability to borrow money, how much you can borrow, and how good of an interest rate you will be offered.  Banks use things like your credit score and credit report to determine your reputation as a borrower, and how risky or safe it is to lend money to you.

However, good or bad credit isn't just limited to borrowing money!  Here is what can be impacted by your credit:

• Borrowing money: This is still the top reason to have a good credit score.
• Insurance: Insurers check your credit to determine whether they should offer you coverage and whether you should get good rates on your coverage.  They look at credit scores and insurance scores (derived from your credit reports).
• Employment: Some employers will check your credit. You have to give permission first, but your credit could determine if you get the job. It gives an idea of your responsibility. Your financial records also give them an idea of whether or not you may be tempted to steal from the company or accept bribes.
• Utilities: Some companies such as electricity, cable, or water require a credit check. If you have bad or no credit, they may require a larger deposit up front for services.
• Renting: Landlords - especially in larger cities - may ask to pull your credit. This can impact whether you are able to rent the apartment or the amount of the security deposit the landlord will require.

What Is a Credit Report?

Credit reporting agencies - called credit bureaus - collect the information for your credit report. The top three agencies most creditors utilize are Equifax, Experian, and TransUnion.

Your credit report collects information that determines your credit score. This information includes:

• Any loans you've had in the past (even if they are paid in full). These usually stay on the report for at least seven years.
• Any loans or lines of credit you have defaulted on that are in collections.
• Public records such as bankruptcy and foreclosure.
  
• Your payment history - such as do you make your payments on time and how many times you have been late with payments.
• Any loans or lines of credit you are currently using (even if the line of credit is paid off but still open and available to use).
  
• How much you have borrowed overall and on each line of credit or loan.
• Your minimum monthly payments.

What Is a Credit Score? How Do I Keep a Good One?

Your credit score is derived from your credit report. It can range from 300 to 850. The higher the number, the better the credit score.  Here are the elements that impact your score:

1. Your payment history makes up 35% of your score. To keep a good credit score make your payments on time and do not allow accounts to become delinquent or go to collections. That has the biggest impact on your score! 
2. How much you owe makes up 30% of your score. This also looks at how much you are using of your revolving credit (i.e. are your credit cards maxed?). So how much of your available credit should you use? It's hard to say, but best practice seems to say use between 7% and 20% of your available credit for the highest scores. So keep your balances low. Also, pay more than the minimum monthly payment to lower your balance. The minimum monthly payment often barely covers your interest each month, so you're not impacting the actual balance.
3. The length of your credit history (time-wise) makes up 15% of your score. So how long has your oldest line of credit been available, and how often do you use it? To keep a good score, it's a good idea not to close your first credit card. If you don't want to keep a balance on it, use it once a month on something small and pay it off - but don't close it!
4. The type of credit you use makes up 10% of your score. It looks at what percentage of yours are fixed and what are revolving. Keep revolving credit lines minimal.
5. Your new credit makes up the final 10% of your score. Have you tried to or succeeded in opening new credit lines recently? To keep a good score, limit how many times you apply for credit (credit inquiries) each year and do not open new lines unnecessarily. Creditors look at opening new lines as potential financial instability, which weakens your score.

Finally, monitor your credit report! This is a way to ensure the information is accurate and protect yourself from identity theft.  You can get a free credit report from annualcreditreport.com once a year from each of the top three agencies mentioned above. The best practice is to check an agency once every four months. Example: Get a report from Equifax in January, Experian in May, TransUnion in September, then you're back to Equifax in January. This FREE website is authorized by federal law to allow everyone access to their own credit information.