What is Credit and How it Affects You

Are you credit worthy written on green card cardWhen you begin managing your finances, you learn pretty quickly that credit is important – but what is it? Credit is the shorthand name for the agreement you enter when you purchase or receive something and then pay for it later. Credit can also refer to the likelihood that you’ll pay for those things. A person with “good credit” has a history of paying for what they’ve purchased on-time and in-full, whereas a person with “bad credit” has a less reliable record. If you’re in the “bad credit” group, you’re not alone. About 70 million people in the US have some inconsistencies in their histories.

Who keeps track of all this?

There are three major credit tracking agencies, also called credit bureaus: Equifax, Experian, and TransUnion. These companies track consumer spending and repayment. If you’ve ever applied for a loan, a credit card, or a mortgage, you have a credit history. That history is detailed in your credit report. Whenever you apply for more credit or a loan, the bank checks your credit report to see your history. Using the payment information on the report, the bank will decide if they want to lend to you. The agencies do not report if you are a high or low credit risk — that’s totally up to the lender to decide. There are lenders who work with people who have lower scores, but generally they’ll charge more interest to cover their risk.

What’s a credit score?

The three credit agencies assign a number to each consumer and that is your credit score. That number works as shorthand to give lenders a quick glimpse into your history without a deep dive into your report. A credit score can range from 300 to 850, and they are categorized as follows:

300-600: Poor
600-675: Fair
675-750: Good
750-800: Very Good
800-850: Exceptional

The actual number range varies from agency to agency, but this gives you a good idea of how they compute things.

When you have a credit score in the Very Good to Exceptional range, you can borrow money at lower interest rates and take advantage of rewards programs. Those programs just aren’t offered to the other credit score categories.

Credit scores and reports aren’t just used to calculate financial risk – there are lots of people who might check them out: a landlord, a utility company, a government agency, or even a potential employer.

How can you raise a credit score?

Almost half of consumers fall into the Poor and Fair credit groups. If that is you, and you’d like to make some improvements to your score – great! There are lots of things you can do, but it’s going to take time.

The first step is to understand your debt. Pull everything together and create a clear picture of what you really owe. Student loans, medical bills, credit card debt, and cash owed to family are all debt. Once you understand what you’re working with, you’ll be able to create a plan.

Debt consolidation is sometimes a solution, and so is refinancing or personal loans. Credit counselors and management firms may also be able to take control of your situation and work on your behalf to lower your rates and obligations. Under the most extreme circumstances, a bankruptcy attorney may be of help to you.

Posted on July 2, 2017 by in Credit Monitoring

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