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Everything You Ever Wanted to Know About Credit and Why It’s Important

Credit is the foundation on which you build your financial life, allowing you to borrow money or access goods and services that you need right now based on the promise you’ll pay it back later. Building and maintaining good credit helps you qualify to borrow money at the best available terms for increasingly larger purchases — like a home or vehicle — when you need them.

While the importance of credit on your finances is clear, it also can impact other aspects of your life like your ability to rent an apartment or home, secure insurance or even find a job.

Types of Credit

Revolving

This is credit you can use repeatedly as you pay it off, like a credit card. You can make purchases so long as you stay under the credit limit, which can change over time. You must make a minimum payment every month, but you can pay any portion of your outstanding balance up to the full amount.

Service Credit

Service credit includes payments and bills from utility companies and service providers like cable, mobile phones and gym memberships. They provide you with a service with the understanding that you will pay for that service after the fact.

Installments

These loans are for a specific sum of money that you repay over a set amount of time such as mortgages, student loans and auto loans.

Charge Cards

Relatively rare nowadays, charge cards are similar to credit cards, but usually used exclusively at a particular establishment like a store or restaurant. They don’t allow you to carry a balance, meaning you must pay all charges in full every month.

How to Start Building Good Credit

To build good credit, you need to establish a credit history of regular credit use and borrowing along with consistent, on-time payments. There are a few ways to begin building your credit history.

  • Secured Credit Card:
    A secured credit card is a credit card that allows you to begin building credit while minimizing the risk of overspending. You pay your lender an initial cash deposit that serves as the credit limit and use the card to make purchases like a regular credit card. Your activity is reported to the major credit bureaus, contributing to your credit history.
  • Become an Authorized User:
    By becoming an authorized user on someone else’s (usually a family member’s) credit card, you get to piggyback off that individual’s existing credit history to start building yours. Depending on what limits the primary cardholder puts in place, you’ll be able to make purchases with the card, which will impact both yours and the primary cardholder’s credit histories.
  • Open a Retail Credit Card:
    Although not always recommended, applying for a retail credit card (think Best Buy or Kohl’s, for example) can be a good step to build your initial credit history. You’ll want to charge a small amount at a time and pay it off in full each month so you won’t pay extra in finance charges.

After you start using and building credit, you’ll start to receive preapproved offers for new cards and potentially other types of loans. While building credit is important, opening up as many credit cards as you can is not. It’s a surefire way to get you into trouble with debt. You will want to establish some limitations on the types of credit you use, keeping in mind what you can realistically repay every month without stretching your finances thin.

All About Credit Reports and Credit Scores

When you start to use and build credit, your credit history is compiled by three independent credit bureaus — TransUnion, Experian and Equifax — and summarized in what is called a credit report. Your credit report is used to determine your credit score, which the three credit bureaus use to determine your creditworthiness.

person viewing a screen with credit score displayed

Examining Your Credit Report

Your credit report includes basic information about you like name, address, date of birth and Social Security number as well as details about your credit history including:

  • The number of credit cards you have, their borrowing limits and current balances.
  • The amounts of all loans you’ve taken out and how much you’ve repaid.
  • Payment history including all on-time, late or missed payments.
  • Any financial setbacks such as charge-offs, accounts in collections, foreclosure, repossessions and bankruptcies. These generally stay on your credit report for about seven years before they fall off.

Everyone is entitled to review their credit reports from each credit bureau and should do so at least twice a year. It’s important to regularly review your credit reports to check for potential identity theft or fraud, as well as any errors. If you find either, you’ll want to take action right away to fix your report and protect yourself.

You can get a free copy of your credit reports annually by visiting AnnualCreditReport.com or by calling 1-877-322-8228.

Understanding Factors Contributing to Your Credit Score

Your credit score is a 3-digit number ranging from a low of 300 to a high of 850 that allows creditors and lenders to quickly determine your creditworthiness. The higher your score, the more likely you’ll be offered the best terms for credit and loans such as lower interest rates. While the credit agencies don’t disclose specifics of how they calculate credit scores, several factors account for varying percentages of your score:

35%
Payment History

Lenders want to know whether you make your payments on time.

30%
Amounts Owed

Also known as credit utilization, this factor looks at how much of your available credit you’re using. Generally, you want to keep your utilization under 30%.

15%
Length of Credit History

This portion looks at how long your credit accounts have been established as well as how long you’ve been using credit overall.

10%
New Credit

This portion looks at how long your credit accounts have been established as well as how long you’ve been using credit overall.

10%
Credit Mix

The diversity, or mix, of your credit accounts — credit cards, mortgage, auto loans, etc. — plays a factor when calculating your score.

Although there are several factors that contribute to your credit score, the most important things you can do to maintain a strong credit score are to make your payments on time every month and not use too much of your available credit.

Unlike your credit report, you’re not entitled to a free copy of your credit score. But there are several ways to get it:

  • Check Your Statement:
    Several creditors have started to provide credit scores to customers on their monthly statements or through their online accounts.
  • Credit Score Service:
    These services offer “free credit scores” funded through advertising or by requiring you to sign up for a credit monitoring service. Be sure to read the fine print before signing up to understand what you’re getting into and whether any hidden fees are involved.
  • Buy a Score:
    You can purchase a copy of your credit score either from the credit bureaus or myfico.com. You’re not required to purchase additional services just to buy your score.

Get Credit Help with a Free Credit Counseling Session

Need help building credit and paying off debt? Start with a free and confidential credit counseling session. We will review your income, expenses and debts to determine the best course of action.

Get started online now

  • Available 24/7
  • Save your progress and return later
  • Easy process with clear instructions
  • Download credit report summary, action plan and budget

Start My Credit Counseling Session

You can also call us Monday – Friday from 6 a.m. – 6 p.m. MST at 866-528-0588 to speak with a certified credit counselor.

a man entering his credit card information into a computer

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