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Understanding Credit

What is credit?

A person's credit refers to a contract between the person borrowing money and the organization lending it to them. The borrower and lender agree to terms of repayment of the money. The two most common forms of credit are loans (student, car, house, etc.) and credit cards.

There are two forms of loans: a secured loan and an unsecured loan. A secured loan is where there is a physical item that can be taken back (repossessed) if the loan is not paid, i.e. a car or a house.

An unsecured loan is where there is no physical item attached to the loan, such as student loans or a personal loan. 

Credit cards can be a good way to establish credit. They also can be easy to overuse and severely harm your credit.

To build credit or to maintain a good score, be sure to pay your credit card bill on time. If possible, it's best to pay the entire balance each month to avoid paying interest.

Credit cards will have an interest rate and fees for spending more than allowed or paying late.

If you are interested in getting a credit card, make sure you know the terms and conditions of the card, interest rates, annual fees, penalties and the grace period for late payments.

In the United States, there are three credit bureaus that collect your payment history from various lenders, creditors, debt collectors, utilities and the courts. These bureaus are Trans Union, Equifax, and Experian.

All three agencies allow for one free annual credit report. Contact the agencies or view their website to find out how to request yours.

Credit reports contain information about who you are, including name, address, birthdate and social security number. It also will tell you how much you owe, to whom you owe it, if you have any court judgments or bankruptcies, and anyone who has requested a copy of your report.

Not all lenders/creditors will report to all three agencies, so some items may not appear on your report from one bureau, but will from another.

Credit reports are used to help lenders determine whether or not they can approve you for a loan or for a credit card. They also may be used to determine employment and whether you are able to rent an apartment.

Depending on your credit history, these reports will determine what type of loans you qualify for, what your interest rate will be and if you will need a co-signer.

Negative items on your credit history such as late payments remain on your report for an average of seven years. Bankruptcies can stay on your report longer.

A credit score determines your credibility as a borrower and how good you are at making payments. Credit scores range from 300 to 850. The higher the score, the more likely you are to be approved for credit and receive a lower interest rate.

There are five categories that help determine your credit score: payment history, amount of debt owed, how long you have had credit history, new credit that you are seeking, and types of credit that you are using.

And yes, your student loans and how timely you pay them back will impact your credit score.

Here are a few tips for building and maintaining a good credit score: 

  • Pay bills early or on time 
  • If one of your bills is sent to a collection agency, pay the full balance as soon as possible 
  • Open a savings or checking account 
  • Establish a credit history by using a credit card with a low credit limit 
  • Review your credit history and report errors