Consumer Financial Education: Credit and Credit Reports
Using credit means you borrow money to buy something. The process very basically breaks down like this:
- You borrow money (via a credit card or loan).
- You buy the thing you want.
- You pay back that loan later – with interest.
Establishing a history of using credit helps credit card and loan services better assess the level of risk of giving your credit in the future. Therefore, it is important to manage your credit responsibly (making credit card and loan payments on time, etc.) and check your credit score regularly to avoid any negative impacts. Below we will go over why credit scores and reports are so important, how to establish credit, and explain some credit card basics.
Credit Reports & Scores
Credit reports document each time you have used credit, whether in the form of a loan or credit card. In addition to your history, the report also uses a formula to create a credit score – a rating or your credit risk. Credit scores can play a crucial role in the financial well-being of consumers. Learn more about how to get your score and maintain a good credit rating.
Credit scores are three digit numbers that banks, credit card companies, and other businesses use to estimate how likely you are to pay back the money you borrow. A higher score means it is easier to qualify for a loan and obtain a better interest rate. Scores typically range from 850 to 300, but different companies use different ranges.
There are Multiple Credit Scores
You can have more than one score, depending on which lender you choose, the credit scoring formula they use, and the information on your report. For most people, the differences are not that big, but you might qualify for lower rates with one lender than another so it pays to shop around.
How are Credit Scores Determined
Your credit scores are based on the information in your credit report, which is provided by your lenders to credit reporting agencies. The biggest agencies are Equifax, TransUnion, and Experian. Several factors influence your score, including:
- How many credit accounts you have
- How long you have had those accounts
- How close you are to your credit limit
- How often you have had late payments
How to Raise Your Score
If you find yourself with a low score there are ways to improve it.
- Paying your bills on time, every time.
- Do not get close to your credit limit.
- A long credit history helps.
- Be careful closing accounts.
- Only apply for credit that you need.
Your credit report matters as much as your score
Mistakes on your credit report can impact your credit score—make sure to check it regularly to ensure accuracy. You can obtain one free credit report annually from www.annualcreditreport.com. Additionally, each credit reporting agencies their own report and there are several other third parties that offer access to your credit report.
When you get your report, check for the following most common mistakes:
- Mistakes in your name, phone number or address
- Loans, credit cards, and other accounts that are not yours
- Reports saying you paid late when you paid on time
- Accounts that you closed that are listed as open
- Free credit reports: https://www.consumer.ftc.gov/articles/0155-free-credit-reports
- More information on credit reports and scores: https://www.usa.gov/credit-reports
- Understand your credit score: https://files.consumerfinance.gov/f/documents/cfpb_adult-fin-ed_understand-your-credit-score.pdf
- Reviewing Your Credit Report: https://dcba.lacounty.gov/portfolio/reviewing-your-credit-report/
Your first attempt to secure credit may be the most difficult, but building a positive credit history can help you in applying for credit cards or loans in the future, and will often allow you to receive a better interest rate.
How do companies decide who gets credit?
Giving someone a credit card or loan is a risk, so companies want to be sure that you will pay back what is owed. Companies want to know if you are a good credit risk, so they review your application along with a credit report. If you have no credit history, it is difficult for the company to assess how likely you are to pay them back on time.
How to establish credit.
Here are some ways to get credit and start building a positive credit history.
- Apply for a department store or gasoline credit card: You would only use a department store or gasoline credit card at a specified number of places, so they present less risk. Also, the credit limit is usually smaller than normal credit card options.
- Apply for a secured credit card: Your credit union or bank offer secured credit cards, which requires you to deposit the amount of the credit limit on the card in an account. If you do not make the payments on the card, the bank will withdraw the money owed from the account.
- Apply for a small loan with your bank or credit union: It is best to start your credit with companies that know you. If you have an account, it appears on your credit report and will help you establish a credit
- Building a better credit report: https://www.consumer.ftc.gov/articles/pdf-0032-building-a-better-credit-report.pdf
- How to Build Credit: https://www.experian.com/blogs/ask-experian/credit-education/improving-credit/building-credit/
- Establishing business credit for the first time: https://www.sba.gov/blog/how-establish-business-credit-first-time
There are so many credit cards to choose from, learn how to choose the best one for you.
- How do you plan to use the credit card?
If you already have a credit card, let history be your guide. If you pay off your balance each month, then you may want to focus on fees and rewards. If you consistently carry a balance, you would want to focus on a card with the lowest interest fees.
- Know what to compare
- APR: A credit card’s annual percentage rate (APR) is typically listed as a range and you will not know your rate until after you are approved.
- Fees: Make sure to compare the fees listed for each card. Common fees include a cash advance fee, late payment fee, and an annual fee.
- APR for Balance Transfers: If you plan on transferring the balance from one card to another, compare the interest rate you are paying now with the one you will pay on the new one, along with any transfer fees.
- Penalty APR: Check for a penalty interest rate. The card issuer must tell you the rate, what triggers the penalty, and how long it would last.
- Shop around and ask for better deals
Look at your bank or credit union’s offerings for credit cards, sometimes the preexisting relationship can help you qualify for a better rate. If you have a credit card but think you are paying too much in fees or interest rate, negotiate with the card issuer to match or beat the rate of a new card you are considering.
- How to find the best credit card for you: https://files.consumerfinance.gov/f/documents/cfpb_adult-fin-ed_how-to-find-the-best-credit-card.pdf
- How to Choose a Credit Card: https://www.experian.com/blogs/ask-experian/how-to-choose-a-credit-card/
- Credit card information from the CFPB: https://www.consumerfinance.gov/practitioner-resources/adult-financial-education/tools-and-resources/#credit-cards
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