What is Credit?

Credit is an agreement between a borrower (or consumer) and a lender that allows the borrower to acquire goods or services immediately and repay the borrower later. Credit is extended to borrowers up to a certain maximum amount. There are often fees and interest charged on credit outstanding for an extended amount of time.

Establishing Good Credit

Having a good credit score can positively impact multiple areas of your life, including your ability to rent, buy or lease a car or buy a house. Job opportunities can also be affected by your credit score.

What is Considered a Good Credit Score?

FICO credit score ranges from 300 to 850, with the lower scores representing higher credit risk. A good credit score is generally considered to be anywhere from 690 to 850, with 850 being an excellent credit score.

The following are ways to establish good credit:

• Start early. The length of your credit history determines your credit score.
• Start small. Don’t apply for credit you don’t need or cannot timely pay off.
• Open a checking and savings account.
• Pay all bills on time (cell phone, internet, utilities, etc.).
• Monitor amounts extended through credit and pay debts owed fully and timely.
• Protect your identity.

Five Components of a Credit Score

• Payment History (35%)
• Ratio of Debt to Available Credit (30%)
• Length of Credit History (15%)
• Types of Credit Used (10%)
• Recent Searches for Credit (10%)

Checking Your Credit Report

A credit report contains your personal information along with your overall credit history. Checking your credit report frequently will ensure your credit information is accurate and avoid inaccuracies which could cause the denial of credit, loans, or even a job.

Tip: Remember to check the name, address, birthdate, social security number, and accuracy of accounts on your credit report.

Where Can You Access Your Credit Report?

Three nationwide credit reporting agencies will provide you with a free credit report, upon request, once every 12 months. These three agencies are listed here:

• Equifax
• Experian
• TransUnion

To request a free credit report from any of these agencies, please visit annualcreditreport.com or call 1-877-322-8228.

Tip: Instead of checking your credit report from all three agencies at once, spread them out every few months so that you can monitor your credit throughout the year for free.

Credit Cards vs. a Loan?

Credit cards offer borrowers the ability to spend (borrow) up to an agreed amount (credit limit). Borrowers can repeatedly borrow funds available and repay. A loan is a lump sum amount provided to the borrower that is repaid in installments based on a predetermined payment plan. Credit cards typically have a higher interest rate due to the short-term nature of repayments and risk to the lender compared to loans.

Loans are best for large, one-time expenses while credit cards can assist with smaller daily purchases that can be repaid to the lender in a short period of time.

Advantages of a credit card

• Use for financial emergencies
• Buy now, pay later
• Purchase protection
• Establishment of good credit if used wisely

Disadvantages of a credit card

• High interest rates and annual fees
• Increases in your personal debt
• Motivation for purchases for things you cannot afford
• Creation of poor credit if not used wisely

Alternatives to credit cards include

• Cash
• Debit cards
• Secured credit card
• Prepaid card
• Enter into a loan agreement (for larger purchases).

Credit Card Tips

The following are a few credit card tips to ensure strong financial health:

• Avoid having multiple credit cards.
• Establish a credit limit that meets your needs but prevents unnecessary spending.
• Shop for the best credit card (rewards, benefits, interest rate,).
• Don’t purchase things you can’t afford.
• Pay your monthly bill on time and in full.
• Monitor and report fraudulent as soon as possible.

To avoid missing a payment due date, be sure to actively track your expenses and watch out for any warning signs of uncontrolled credit usage. Using one credit card to pay off another or only making the minimum payment on the credit card is a sign of an unhealthy reliance on credit cards. If you are having trouble making your credit card payments, call your credit card company. They may be willing to work out a payment plan.

 

Getting a Credit Card

There are crucial elements to consider when reviewing a credit card offer. Every credit card company is required to outline the fine print of their cards via Schumer box, which standardizes all of the pertinent information you need to know to compare credit card offers. Each Schumer box will include the following:

Fees - Several different types of fees are associated to credit cards. Sometimes these fees can be hidden so it is important to read carefully before accepting the card. Common fees include late fees, which are imposed when minimum payments are not paid on time, and over-the-limit fees that are charged when you exceed the credit limit.

Interest Rate – Interest is the cost charged to borrowers in exchange for the debt extended by lenders. Depending on the credit institution and the borrower’s credit history, rates can vary widely. You will not be charged interest if you don’t carry a balance on your card from month to month. This is why paying off your credit card balance each month is essential to managing your personal debt and developing highly effective credit card habits.

APR - An Annual Percentage Rate (APR) is the cost of borrowing on a credit card. It is calculated on an annual basis and generally cannot be changed for the first 12 months unless it is a promotional or variable rate.

Grace Period - The grace period is the time you have before you’ll be charged interest on your purchases. Grace periods are generally between 20 days up to a month. To receive a grace period, you must meet these two conditions:

1. Pay your new balance in full for the billing period
2. Pay the balance in full before the payment due date

Making a minimum payment does not extend a grace period or prevent interest and fees. In cases in which the minimum payment is made, you’ll be charged interest on future purchases starting on any new purchase dates. The only way to prevent interest and fees is to pay the full balance within the grace period.