Most of us love our credit cards, the perks they offer, and the ability to buy now and pay later. But, if you don’t understand how to properly manage your credit you can find yourself in big financial trouble.
Below are some credit basics to get us started. Please use your credit cards responsibly.
What is credit?
Credit is “the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.” Credit can be established in many different ways, but once established, it is important to monitor it carefully as it will be looked at by lenders down the line.
No credit=no credit score and nothing on your credit report. Essentially, you have not joined the credit system.
Bad credit=negative marks on your credit report. The marks cause your score to decrease.
What is a credit report?
It is wise to check your credit report quarterly (because you can) to make sure that all is in order. You are allotted a free credit report from each bureau annually, so every 4 months, you should request a new report from a different bureau. The three credit bureaus are Experian, Equifax, and TransUnion.
Reviewing your credit report is a way to check for any fraud on your name. You will want to make sure that all lines of credit reported are valid and authorized by you. Make sure that no one has opened a line of credit in your name. IDENTITY THEFT CAN HAPPEN TO YOU. If for some reason there are errors on your report, you can handle it with one of the three bureaus if not the originating party for that line of credit.
What is a credit score?
A credit score is a number assigned to you by lenders based on your creditworthiness. Credit scores are often deemed “good” or “bad” and can greatly affect your chances of getting an apartment, home loan, auto loan, new credit card, etc.
Below is a typical scale that can be used to determine if you have a good credit score.
Needs Improvement ≤650
What affects my credit score?
There are many factors that affect your score and determine why it fluctuates. Below is a high-level breakdown of how payment history, credit utilization, credit history, and credit mix make up your credit score.
35% of your credit score is payment history
Always always always pay the minimum balance on your credit card even if you can’t pay the statement balance. The minimum balance is usually manageable. Late payments will negatively affect your credit score and remain on your credit report for 7 years!
Pamela’s Pro Tip: To avoid late payments, set your minimum payments to auto pay.
30% of your credit score is credit utilization
Always try to keep your credit card balance 30% below your credit limit. If you find yourself always teetering the line with your balance, call your credit card company to increase your limit.
15% of your credit score is credit history
Your credit history includes how many lines of credit you have open, how long the accounts have been open, the payments on them, their credit limits, etc. Your average length of credit history greatly affects your score. Think, a 1-day old line of credit vs one that is 720 days old. Which one would you trust more?
When checking your credit history, soft hits don’t affect your score. A soft hit can be described as when you, employers, landlords, etc. check your score. Hard hits do affect your score. A hard hit is when you try to take on a new line of credit, such as applying for a loan or a new credit card.
Pamela’s Pro Tip: Make sure the first credit card you open doesn’t have an annual fee. If for some reason you decide to stop using this card as your primary credit card, it will be nice to not have to pay an annual fee.
10% of your credit score is credit mix
Credit mix is the different types of lines of credit you have open. Student loans, personal loans, store credit cards, Amex, Mastercard, VISA, etc. A vast credit mix will positively affect your score.
10% of your credit score is the new credit
Remember, opening new lines of credit negatively affect your score. Also, be wise and don’t open more than one line of credit every 12 months.
Where do I find my credit score?
I first recommend you look at your online banking situation to see if they provide your credit score. I have provided examples below of what that could look like. My Barclaycard provides me with my FICO® score while Chase provides me with a VantageScore® and a FICO® score.
Depending on the type of credit card you have, you may have credit education resources available to you. I think the Credit JourneySM Chase provides for Slate card holders is a wonderful resource.
There also are many places online that advertise free credit score access. All I recommend is that you read everything very carefully before releasing your personal information.
The perfectionist in me is annoyed at that B on my VantageScore® report. Let’s talk about what I can do to get an A.
More to come on credit scores and reports in Credit 201.