What Is Credit?
Credit is the ability to make payments for something over time, such as a car or house. Because most people don’t have enough money saved to pay cash up-front for these items, it is necessary to use credit to spread the cost out over time.
Good Credit? Bad Credit? No Credit?
Your personal credit score tells lenders how likely you are to repay a loan. If your credit is good, you will typically be offered a lower rate by a lender because there is a good chance that you will make payments on time and repay the loan in full.
Conversely, if you have bad credit, you will typically have to pay a higher interest rate to provide the lender with some extra protection in case you don’t make payments as promised.
If you are just starting out and have not yet established a credit history, lenders won’t know whether you’re likely to pay or not. In this case, you will probably have to pay a higher interest rate because you have not yet proven the ability to make payments. It’s a good idea to start building credit early to save money on large purchases down the road. Click here for more information about building credit.
How is credit calculated?
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. There are three major credit bureaus that provide credit reports: Equifax, Experian and TransUnion. Your credit score may differ slightly between these 3 providers due to different equations being used.
Your credit score can mean the difference between being denied or approved for credit, and a low or high interest rate. A good score can help you qualify for an apartment rental and even help you get utilities connected without a deposit.
What goes into a credit score?
Data from your credit report goes into five major categories that make up a score. These 5 categories show both positive and negative trends in your history and your overall score tells the lender how risky of a borrower you are.
Elements of your credit score:
Payment history: Your account payment information, including any delinquencies and public records.
Amounts owed: How much you owe on your accounts.
Length of credit history: How long ago you opened accounts and time since account activity.
Types of credit used: The mix of accounts you have, such as revolving and installment.
New credit: Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
Personal or demographic information such as age, race, address, marital status, income and employment do not affect your credit score.