Credit

Sections:

What is credit?

Credit is borrowed money (provided by a bank or credit card company) that you can use to make purchases now with the agreement that you will repay the amount you owe at a later time. In addition to the amount you borrowed (principal amount), you are typically required to pay a fee for the money that you borrowed (interest). 

Building Credit

What is a credit score?

A credit score is a 3-digit number, ranging from 300 – 850, that tells lenders how risky it is to lend you money based on your borrowing (credit) history. Your credit score can mean the difference between being approved or denied for loans or determining whether you qualify for a low or high-interest rate for things like cars, houses and personal loans.

 

 

What factors impact your credit score?

  • Payment history. Always pay your bills on time.
  • Credit usage. Use your credit responsibly and limit the amount you owe.
  • Length of credit history. Open and close your accounts with care.
  • New credit inquiries. Try not to apply for new credit too often. Inquiries stay on your report for two years and may raise a red flag.
  • Types of credit. Finance companies are lenders of last resort.

**Not all factors are equal, but they all play a role in your total credit score.**

What is a credit report?

A credit report is a collection of information that lenders utilize to determine whether or not to offer you a loan. Credit reports often consist of information such as:

  • Loans that you have used in the past, even if you have paid them off (generally the past seven years, although there are exceptions)
  • Loans that you are currently using (including any unused lines of credit)
  • How much you have borrowed
  • Your required minimum monthly payments
  • Your payment history—have you made late payments, or are you always on time?
  • Public records such as bankruptcy and foreclosure
  • Any loans that you have defaulted on and are in collections

You can obtain your credit report for free at AnnualCreditReport.com. This website offers you a free report from the three major credit bureaus: Equifax, Experian, and TransUnion.

Keeping on Top of Your Credit

It is very important that you are on top of your credit. Check your credit reports for errors such as your name, contact information, prior jobs, making sure each credit account is listed, etc. Unfortunately, errors can be very common, so be sure to send any corrections you may have in writing.

Understanding your credit limit can help control your spending. Keep your balances below 30% of the credit limit for each credit card. Some cards may not show your credit limit, which can, in turn, affect your credit score.

For more information on building credit, please visit this section on the Real World Playbook sidekick site.

Credit Cards

Credit cards are financial tools that allow you to pay for goods and services “on credit” with the idea that you will repay them at the end of every billing cycle. When choosing between credit cards, keep in mind that they vary between annual fees, rewards and benefits, interest rate, etc. 

While you should use credit cards wisely, it is important to remember that paying in cash will not help you to build credit.

For more information on credit cards, please see the credit cards section on the Real World Playbook sidekick site.

Debit Cards

Remember to also be cautious when using debit cards. Your entire account balance can be stolen and banks are not always helpful in fixing losses. If you are planning on taking a trip, you can always freeze a certain amount as a hold to use at hotels, gas stations, car rental, etc.

Identity Theft

Identity theft is the fraudulent use of someone’s private identifying information. There is no need for identity theft insurance, but if you suspect any identity theft, call each of the three credit agencies to have a fraud alert placed on your credit. You will need to go to the police station and file a report, along with completing an Identity Theft Affidavit. All states allow you to place a full freeze on your credit report, which means that no one can open an account without your permission.

Protecting Your Identity

Here are some tips to help you protect your identity:

  • Do not give out your social security number
  • Credit applications that come in the mail should be shredded or call 888-5OPTOUT to stop them from coming
  • Watch for online phishing and wireless networks
  • Monitor your credit reports
  • Avoid carrying your checkbook or social security card
  • Do not use your mother’s real maiden name or your real city of birth
  • Make sure that your mail is delivered to a secure location (either a locked mailbox or drops inside your home)