Whether you’re new to credit or you just want to make sure you understand it fully, you’ve come to the right place. Here, we’re covering all the credit basics to give you a solid foundation for moving forward. Let’s jump right in.
What Is Credit?
Credit is when you receive money, a good, or a service, and you agree to pay for it in the future—usually with added interest. Nowadays, we use credit to buy lots of things, such as houses, cars, furniture, and other big-ticket items.
If you use it responsibly, credit can be a useful tool that helps you get things and go places. But if you don’t, you’ll have to face some negative consequences that will make your life harder. That’s why we recommend you understand how credit works before you jump in headfirst.
What Is a Credit Score?
Your credit score is a 3-digit number, typically on a scale of 300 to 850, that suggests how creditworthy you are—meaning, how good you are with credit and how much you can be trusted to pay back what you borrow. Potential lenders (or retailers, or landlords) will use this number to decide what kinds of credit cards and loans to offer you. Generally, the higher the score, the better the offers.
There are a few different types of scores, but the two best-known are your FICO score and your VantageScore. They’re calculated based on the information that shows up on your credit report.
What Is a Credit Report?
A credit report is essentially a record of your five credit factors: payment history, credit utilization, credit length, account diversity, and new credit. It also shows things like your name and address and public records.
When you apply for something like, say, a mortgage, the lender will pull your credit report. They will then use one of the scoring models, like FICO, to determine your score based on the five factors.
What Are the Three Credit Bureaus?
The three main credit bureaus are Equifax, Experian and TransUnion. When lenders want to see your credit report, they will request it from one or more of these reporting agencies.
Your report and score can differ from bureau to bureau because they don’t always have the same information. If your Experian report looks good but a certain creditor only uses TransUnion reports, you should know what your TransUnion report looks like too.
What Are Good and Bad Credit Scores?
Generally, “good” scores are anything above 670, and “bad” scores are anything below 670. But let’s be more specific:
- Excellent: 800 – 850
- Very good: 740 – 799
- Good: 670 – 739
- Fair: 580 – 669
- Poor: 300 – 579
If you have a score that’s considered “good” or better, great! Good scores mean better chances of being approved for credit, lower interest rates, and higher credit limits, so keep it up. Just remember that there’s a world of difference between a good score and a very good or even excellent score, so you likely still have room for improvement.
What Actions Hurt My Credit?
We’ve all been there—sometimes life happens and you can’t avoid damaging your credit. Your credit can be brought down a lot faster than it can be brought up, though, so it might help to review these things that can hurt your credit:
- Not paying bills on time
- Filing for bankruptcy or foreclosure
- Applying for too many credit accounts
- Carrying high balances on your credit cards
- Ignoring questionable negative items on your report
This covers the basics of credit, if you are interested in knowing more about your credit, submit your information here and we can help.