Credit is pretty much a mandatory element in today's world. There's not much that you can accomplish without it. Everything from buying vehicles to a residence to business entities revolves around the concept of credit. It's not just creditors who look at your credit, though. Landlords, employers, insurance companies and even cell phone providers examine credit histories before they decide with whom to do business.
What Is Credit
Simply put, credit is the ability to purchase goods or borrow money with the understanding that repayment will come at a later date. It is all very structured, with a credit limit in place, terms of borrowing and precise dates by which payments must be paid.
When you buy something on credit, you're not expected to pay back the amount borrowed right at once. Rather, you get monthly statements with a more manageable amount due. Credit card companies and other lending institutions attach interest rates to any money borrowed. An interest rate is the money the lender charges you to borrow money and is usually expressed as a percentage. Each month, a borrower gets a statement requiring a minimum payment that includes interest, as well as the principal.
Establishing Credit
There are many ways by which to build your credit history. Young people, for instance, often apply for credit cards when they go to college. Often, colleges will host events that allow credit card issuers to meet with students to help them understand the world of credit and to extend them offers. A credit card can be an important asset for a student, helping them to absorb the expenses of the college experience.
When the card issuer offers credit, those credit card accounts depend on different variables. For instance, if it is your first credit card, you could very well have a low credit limit of a few hundred dollars and might also be a secured.
Apply for Secured Credit Card
A secured credit card is one that functions a lot like traditional credit cards and is a great way to starting building credit. One major difference is that with a secured card, you pay a cash security deposit up front to guarantee your credit line. It’s likely you’re your credit limit will match your deposit until you can demonstrate positive spending behaviors and potentially move on to an unsecured credit card.
Generally speaking, an unsecured credit card is a better deal for the consumer. When the card is unsecured, it means that a deposit does not have to be put down as collateral. Most credit cards are unsecured and come with better perks, lower fees and lower interest rates. People with stronger credit scores are more likely to be approved for unsecured credit cards.
What Is a Credit Score
Your credit score is the numerical expression that is based on a person's credit report. The aim of a credit score is to determine a borrower's trustworthiness. It is a three-digit number that ranges from 300 to 850 and that score is the numerical estimation of how likely a borrower is going to pay back money lent.
Those who haven't used credit yet, will not have a credit score. These would be consumers who prefer and are able to pay for everything that they have with their own capital (i.e with cash, check or debit card for example). However, this is fairly uncommon. According to the Consumer Financial Protection Bureau (CFPB), about 26 million American adults are considered to be "credit invisible", meaning they have no credit history.
Your credit score - that magic number that others use to predict whether you'll pay your debts - is divided into several different sections. Each number corresponds with a label. Those labels range from very poor to excellent. The range 300 to 499 is the very bottom of the credit range and people with credit scores within this range are labeled as very poor, meaning that there is great risk involved in lending to them. About five percent of Americans represent this credit score zone.
The poor label corresponds to a score between 500 and 600. About 21 percent of Americans represent this credit zone. Scores between 601 and 660 represent the fair range and about 13 percent of Americans can be found here. They might have higher interest rates when it comes to buying a car, but a score in this range should enable them to secure a loan, which will very much be on the lender's terms.
The good range of credit scores is between 661 and 780 and about 38 percent of Americans that hold credit are in this zone. The excellent credit zone lies between 781 and 850. People with scores above 661 will see more favorable lending conditions.
Who Determines Your Credit Score
There are three main credit bureaus in the United States and they set your credit score, which then affects your ability to borrow money. Indeed, Experian, Equifax and Transunion each have access to all borrowers' credit reports and each bureau has its own precise formula for coming up with your credit score. Depending on which company has formulated your score, it may vary by a few points.
How Do You Get Bad Credit
Bad credit is usually defined as a score lower than 580. Having negative credit means that negative factors appear in your credit history such as a spotty payment history. High debt balances, bankruptcy and previous delinquencies also contribute to a bad credit rating. If you do not pay your bill on time, you're hurting your own credit score, as well as your wallet. Lenders apply extra fees for late payments.
Repairing bad credit is possible and it's as easy as paying your bills on time. Remember that you're not being asked to pay for everything all at once. Even though your score won't leap from poor to excellent overnight, each positive step forward is a way to improve your score. It could take months or years to fully repair a bad credit rating.
How Do You Get Good Credit
Making your payments on time is a great way develop and maintain good credit. Having a balance that doesn't approach the card's limit is another way. Even maintaining employment and a primary residence for more than two years helps, because lenders look at that as a kind of stability that is transferable. One important tool that consumers have is the ability to examine their credit report for free, so that they are better able to figure out how to get, or maintain, good credit. Free credit reports are available every 12-months at annualcreditreport.com.
What Can You Accomplish With Credit
Credit is the key to most everything that's got to do with money in this world. If you have great credit, lenders will bend over backward to loan to you, knowing that they are making a wise investment. If you have poor credit, they will not let you borrow and when they do, they will charge you a lot for the service, knowing that your risky credit history makes you a liability. It's never too early to start thinking about your credit, and by the time college rolls around, you'll want to begin to lay the groundwork for good credit.
