What is credit? Credit is borrowed money that you can use to purchase goods and services when you need them. You get credit from a credit grantor, whom you agree to pay back the amount you spent, plus applicable finance charges, at an agreed-upon time.
There are four types of credit:
Revolving credit. With revolving credit, you are given a maximum credit limit, and you can make charges up to that limit. Each month, you carry a balance (or revolve the debt) and make a payment. Most credit cards are a form of revolving credit.
Charge cards. While they often look like revolving credit cards and are used in the same way, charge accounts differ in that you must pay the total balance every month.
Service credit. Your agreements with service providers are all credit arrangements. You receive electricity, cellular phone service, gym membership, etc., with the agreement that you will pay for them each month. Not all service accounts are reported in your credit history.
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. Car loans and mortgages are two examples of installment credit.
Why is good credit important? Good credit is necessary if you plan to use credit to make a major purchase, such as a car or a home, or want to be able to take advantage of the convenience credit can provide. The importance of good credit also extends beyond purchases, in that your credit information may be used by potential employers and landlords as part of the selection process. Credit grantors review credit applications and credit reports to determine financial risk: If they lend you money, extend you credit or give you goods and services, will you pay them back? They may consider your income, how long you’ve lived at your present address, how long you’ve worked for the same employer, what kinds of assets you have and the balances of your bank accounts. Often, though, the primary resource guiding their decision is your credit information.
What is a credit report? Your credit report contains your credit history as reported to the credit reporting agency by lenders who have extended credit to you. The information in your credit report is also used to generate credit scores such as your FICO® Scores. Your credit report lists what types of credit you use, the length of time your accounts have been open, and whether you've paid your bills on time. It tells lenders how much credit you've used and whether you're seeking new sources of credit. It gives lenders a broader view of your credit history than do other data sources, such as a bank's own customer data. A credit report also includes information on where you live, and whether you’ve been sued or arrested, or have filed for bankruptcy.
What is a credit score? Your financial health is often expressed by one number — your credit score. Credit scores are an assessment of your credit history and how well you handle money. Lenders use them to determine interest rates, credit limits and more.
What is considered a good credit score? Most credit scores – including the FICO score and the latest version of the VantageScore – operate within the range of 301 to 850. Within that range, there are different categories, from bad to excellent.
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
But even these aren’t set in stone. That’s because lenders all have their own definitions of what is a good credit score. One lender that is looking to approve more borrowers might approve applicants with credit scores of 680 or higher. Another might be more selective and only approve those with scores of 750 or higher. Or both lenders might offer credit to anyone with a score of at least 650, but charge consumers with scores below 700 a higher interest rate!
Where can I check my credit report and Score? You are entitled to one free credit report from each credit bureaus (Equifax, TransUnion and Experian) every year. I recommend you full one official credit bureau credit report every 4 months. In between that time, you can sign up with Credit Karma to get your credit report and score. Also, Credit Karma allows you check your credit report and score monthly. The credit score exact as those from the credit bureau, but it will give you a pretty good idea of the range (Excellent, Good, Fair, Poor, Bad).
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