Credit 101

young women w orange piggybankYou may have heard that having good “credit” is important, but you may be unsure about what that means. Your “credit” is an indication of your trustworthiness in repaying debt and consists of your credit history, your credit report and your credit score.

  • Credit history: Your credit history is a summary of your past financial transactions. It includes a list of your credit cards, loans and information about each account.
  • Credit report: Your credit report is a written account of your credit history and indicates how well you manage your money and pay back debt. Three credit reporting agencies – Equifax, Experian and TransUnion – maintain credit reports. You can request a free credit report once every year from each of the three main credit reporting agencies on AnnualCreditReport.com. (It’s a good idea to review your reports for accuracy.)
  • Credit score: Your credit score is a number based on your credit report and is meant to summarize your credit history. Lenders use credit scores to gauge how likely you are to pay back a new debt based on your previous borrowing track record. They use your credit score to make lending decisions. More specifically, lenders will use a credit score to determine whether or not they’ll lend you money via an auto loan, credit card or mortgage – and how much interest they will charge based on what you borrow.

Each of the main credit reporting agencies above calculates a credit score based on its own criteria. A separate company, Fair Isaac Corporation (FICO) created its own credit score. The FICO score is the most common credit scored used by lenders to evaluate credit history. FICO scores range from 300–850. The higher the number, the better. Some websites provide free credit scores if you’re willing to provide them with personal information.

Strengthen your credit score

A good credit score generally entitles you to the best offers and or terms or conditions on loans. To maintain a good credit score, consider these tips:

  • Pay your bills on time.
  • Avoid credit card debt.
  • Avoid using all available credit.
  • Don’t apply for too much credit.
  • Check your credit report at least once a year from each credit reporting agency.

Following the tips above can put you on the path to a healthier financial future.

Related Reading