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Credit Guide

Updated: Apr 23, 2023


Credit is the ability to borrow money (in this case from a credit card company) with the understanding that you'll repay it or pay interest on what you owe if you can't repay it immediately.

Essentially buying things on credit, is like taking out a loan


Interest - the fee charged for borrowing money	
Loan - money borrowed with the expectation that it will be repaid (plus interest) over time.

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What is a Credit Score

If you are requesting credit from a bank or other lender, they want to make sure you're good for it!.


Your credit score is a tool that banks, lenders, credit companies, landlords, and employers use to measure how trustworthy you are financially speaking.



Credit Score: your real world financial GPA - this is a number assigned to you based on your credit history that conveys to lenders how risky it is to lend you money


Credit scores range from 300-850, and it's used to quantity your financial wellness. The higher the score, the better!


Score Ranges

While a score of 700 and up is seen as great, there are a few more specific ranges to be mindful of:

  • 300-579; Poor

  • 580-669; Fair

  • 670-739; Good

  • 740-799; Very Good

  • 800-850; Excellent

The goal is to get your credit score to the excellent range and to maintain it if it's already there!



Why It Matters

Having a good credit score, or showing that your are financially trustworthy and responsible is important whenever someone is going to take a financial risk on you.


These risks include applying for a credit card, applying for a loan (to buy a home or car, for example) or applying to rent an apartment. Some financial career positions even require that you have good credit.


If you have a subpar credit score, you seem riskier (when it comes to money.) You're unfortunately a lot less likely to get that credit card, loan, or apartment. And, even if you do, you'll pay a much higher interest rate.



Cost of Bad Credit

Let's take a look at an example to see how your credit score (as well as a higher interest rate) can really cost you.


Say you buy a car for $20,000 0 you pay $5K upfront and take out a $15K loan which you plan to pay back over 5 years.


If you have good credit and secure a loan with 4% interest, you'll wind up paying $16,575 total for that loan.


If you have bad credit and get a loan with an 11% interest rate, you'll wind up paying $19,568 for that loan. An extra $3,000!



Rate Negotiation

If you are having trouble chipping away at credit card debt, lowering your APR could help.


Most credit cards have a variable APR. IF you're not already at the low end of the range, call up the credit card company and ask for your APR to be lowered.


To strengthen your argument:

  • highlight any history you have of on time payments

  • mention if your credit score has gone up recently

  • explain any circumstances that has led to temporary financial hardship (without going into too much personal detail)

  • mention that a lower APR would incentivize you to pay off more of the principal each month to get out of debt.


FICO vs. Vantage

There are 2 main ways that your credit score is calculated:


FICO Score

  • a credit score, as calculated by Fair Isaac Corporation

Vantage Score

  • one of the common calculations of your credit score - often checked by banks and other lenders when you apply for credit.


Both scores range from 300-850 and use mostly the same factors to determine your score, though the exact calculation is a little different.


Factors In Your Score

Lots of factors impact your credit score, but not all of them do so equally. From greatest to least impactful, your current score is determined by:

  • Your payment history (35%)

  • Your credit utilization (30%)

  • Length of credit history (15%)

  • Your credit mix (10%)

  • Recent credit inquiries (10%)


Payment History - a record of how reliably you make on time payments on your loans, and whether you've missed any payments

Credit Utilization - the percentage of your total credit limit that you are using (calculated by dividing your credit card balance by your credit card limit) the lower the better! 

Credit History - a record of your repayment of debts (like credit card bills), used to understand the risk associated with lending you money.

Credit Mix - what types of debt you have (credit cards, loans, student loans, mortgages)

Credit Inquiries - credit checks, or requests to look into your credit history - there are 2 kinds, hard inquiries and soft inquiries. 

Your credit score will usually fluctuate, however you want to avoid a steep decline.



Checking Your Score

Being in control of your credit is definitely one of those "the more you know" situations - time to come up with a system to monitor your score.


There are a few ways to check your score:

  1. Credit Card Companies

  2. A Credit Bureau

    • as the official record of personal credit scores and reports these agencies make your information available to inquiries like credit card companies, landlords, and employers

    • both of these reports are generated via soft inquiry, meaning they won't stay on your credit report or impact your credit score. Yay!


Annual Credit Report

There are 3 credit bureaus:

  • Experian

  • TransUnion

  • Equifax

These agencies keep the official record of your credit known as a credit report. You can request a credit report annually at www.annualcreditreport.com, which includes information from all 3 bureaus.


You can also request a report from each of the 3 bureaus per year, without it having an ffect on your score.


Best Practice

Experts recommend getting a full credit report at least once a year (if not once a quarter) to review your transactions and do a deep dive into your credit history.


The credit report will give you the lowdown on everything that impacts your credit score - from the types of accounts you hold, to your payment history, to new accounts you opened recently.


By checking your credit report regularly, you'll always be on top of your credit score and you'll know right away if something seems off or incorrect!


Your credit report is what a potential landlord or lender uses to evaluate your creditworthiness, so it's important to know what they'll see.



Decoding The Credit Report

Credit reports vary a little depending on which credit bureau you're getting it from, but they all contain more or less the same info:

  • Personal information

  • Account information and history

  • Credit applications / inquiries

  • Public records

The report information is indicated by an alpha numerical code, so you may have to look up what the codes mean to understand what's goin on (for example, #1 means a payment was late up to 90 days)


Account Info

The account info section will show how many lines of credit you have (currently open, or past accounts) like credit cards, mortgages, and personal loans.


For each account you'll see:

  • The date the account was opened or closed

  • Payment history and weather you have any late payments on your record

  • Your credit utilization

  • Your account balance

You'll be able to find if any account is in default or has been sent to a collection agency. Note that the Account Info section has the greatest impact on your credit score, so it pays to make sure it's accurate, and to dispute it if not.


Credit Inquiries

This section will show all the times that someone has made a hard inquiry into your credit - like if you've applied for a credit card, or auto loan, apartment, or any other type of line of credit.


Credit inquiries impact your credit score, but not as much as Account History does.


Public Record

The public record section will include any information about your finances that are stored in the public record or the government's database which is assessable to anyone. Foreclosure, liens, legal suits, and bankruptcy are examples of public record. All of these can hurt your credit score.


Note: In general, what's listed here isn't great news, so ideally you'll want this section to be empty.


Disputing

If something on your credit report doesn't look right, you can get it changed by disputing it.


In order to do this you'll file a dispute directly with the credit bureau that reported the issue. You will need to provide some personal information and any documentation that helps prove the error. The dispute process for each bureau is listed below.



Checking Your Credit Score & Report Process
  • Select which credit bureau you want to use

  • Create an account

  • Input your information (name, social security, date of birth,

  • Submit to receive your credit report

  • Read through your credit report

  • Decode anything unclear in your credit report

  • If there are any errors, file a dispute with that credit bureau


Key Takeaways
  • Try To Avoid Late Payments

  • Monitor Your Credit Regularly

  • Avoid Closing Accounts

  • Apply For Credit Sparingly

  • Keep Credit Utilization Low




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