Managing Credit
You have probably heard people talk about credit scores, or "building credit." But what exactly is credit? Read on to learn more!
What is a credit score?
A credit score is a number that shows how good you are at managing credit. It is a snapshot of your financial history calculated into a three-digit numerical score, also frequently referred to as your FICO score. FICO scores range from 300 to 850, and a good credit score is typically considered to be 670 or higher.
Lenders use your credit score to decide if they will loan you money and what interest rates to offer to you. So it is important to have good a credit score and report to ensure the best rates for you! Watch the video below to learn more about credit scores.
How is my credit score determined?
Your credit score is is based on things like how timely you pay your bills, your credit utilization (how much credit you're using compared to your overall credit limits), the length of your credit history, the types of credit accounts you have, and recent credit inquiries on your record. Each of these plays a role in showing lenders how reliable you are as a borrower.
Regularly checking your credit score and maintaining good credit habits can help improve your credit score over time.
What is a credit report?
A credit report is a breakdown of your complete credit history. All of your credit accounts are reported to Credit Reporting Agencies (CRAs), which gather information about your finances, including credit accounts, payment history, where you live and work, and other information. There are three credit reporting agencies in the United States: Equifax, Experian and TransUnion. Lenders use a credit report to determine how likely an applicant is to repay a loan.
Watch the video below to learn more about credit reports.
How can I get my credit report?
You can get your credit report for free once a year from each of the three major credit bureaus—Experian, TransUnion, and Equifax—at AnnualCreditReport.com. You can also request it directly from the bureaus' websites. Just provide some personal information to verify your identity!
Why is it important to have a good credit score and credit report?
Your credit report and credit score are the main factors in your ability to borrow money. Your credit score and report informs potential lenders about your level of responsibility (or risk) as a borrower. In other words, your past financial habits determine your ability to borrow money in the future, as well as the interest rate you will have to pay on future loans. Individuals with good credit are generally able to open new credit accounts more easily and pay lower interest rates; individuals with low credit scores or minimal credit history may have a harder time qualifying for new credit and generally must pay higher interest rates.
When should I start "building credit"?
You should start building credit as soon as possible! Most people begin to establish or "build" credit in college or early adulthood because this is when you might first have an apartment lease, student loan, credit card, or cell phone bill. Opening a credit card, becoming an authorized user on a family member's account, or taking out a small loan can help establish your credit history. The earlier you start, the more time you have to build a positive credit score, which can benefit you when applying for loans, apartments, or even jobs in the future! But remember - to establish good credit, you have to establish good money habits and pay your bills on time!
Credit Cards
Credit cards are one of the most widely used forms of credit. A credit card allows you to borrow money in real time, up to a predetermined limit. Responsible credit card use can be a great way to build credit history and boost your score.
While there are many positives to credit cards, they can also cause problems if you are not well informed. Your credit card limit is not additional income. Every time you pay for something on a card, you are responsible for paying it back. If you do not pay off your balance each month, you will be responsible for that value PLUS interest.
Quick tips
- Understand interest and fees — Annual percentage rate (APR) is the interest rate you will be charged if you carry a balance from month to month. Many credit cards also have other fees. These may include late fees, foreign transaction fees, over the limit fees or annual fees. Always compare a few cards before deciding to open an account.
- Make on-time payments, every time — Paying on time allows you to avoid late fees or negative credit effects. A late or missed payment stays on your credit report for seven years!
- Don’t carry a balance from month to month — You can avoid interest by paying your full balance each month.
- Start small — Keep your credit utilization low and build a habit of responsible credit use by putting small regular charges, like utilities or gas, on your card.
This information is being provided for educational purposes only; it does not constitute an endorsement or approval by the University of Kansas. The University of Kansas bears no responsibility for the accuracy, legality or content of the resources listed.