All About Credit
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What is Credit?
What is Credit?
Credit is the ability to make payments for something over time, such as a car or house. Because most people don’t have enough money saved to pay cash up-front for these items, it is necessary to use credit to spread the cost out over time.
Good Credit? Bad Credit? No Credit?
Your personal credit score tells lenders how likely you are to repay a loan. If your credit is good, you will typically be offered a lower rate by a lender because there is a good chance that you will make payments on time and repay the loan in full.
Conversely, if you have bad credit, you will typically have to pay a higher interest rate to provide the lender with some extra protection in case you don’t make payments as promised.
If you are just starting out and have not yet established a credit history, lenders won’t know whether you’re likely to pay or not. In this case, you will probably have to pay a higher interest rate because you have not yet proven the ability to make payments. It’s a good idea to start building credit early to save money on large purchases down the road. Click the Building Credit tab to the left for more information about building credit.
How is Credit Calculated?
Your credit score is a three-digit number generated by a mathematical algorithm using information in your credit report. There are three major credit bureaus that provide credit reports: Equifax, Experian and TransUnion. Your credit score may differ slightly between these 3 providers due to different equations being used.
Your credit score can mean the difference between being denied or approved for credit, and a low or high interest rate. A good score can help you qualify for an apartment rental and even help you get utilities connected without a deposit.
What Goes into a Credit Score?
Data from your credit report goes into five major categories that make up a score. These 5 categories show both positive and negative trends in your history and your overall score tells the lender how risky of a borrower you are.
Elements of your credit score:
![Credit score graphic of what impacts credit score: payment history/amount of debt/length of credit history/credit mix/new credit]()
Payment history: Your account payment information, including any delinquencies and public records.
Amounts owed: How much you owe on your accounts.
Length of credit history: How long ago you opened accounts and time since account activity.
Types of credit used: The mix of accounts you have, such as revolving and installment.
New credit: Your pursuit of new credit, including credit inquiries and number of recently opened accounts.
Personal or demographic information such as age, race, address, marital status, income and employment do not affect your credit score.
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Why Do I Need Credit?
While many people think credit is only important for getting a loan, there are many other times your credit can affect you. Lenders, insurance companies, landlords, phone companies and even employers can look up your credit score to make decisions about you. That means that even if you’re not planning on using credit to buy a car or house, your credit score can still play a major role in the rates you pay for services and even the jobs you may be offered.
It’s also important to pay attention to your credit report to make sure there are no errors that could affect you negatively. The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
For more information on how to order your report and report any inaccuracies, visit the Federal Trade Commission’s credit information site here.
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Building Credit
How do I get credit?
Industrial Credit Union and other lenders extend credit by loaning you money at an agreed-upon amount and payment term (the length of time you have to repay the loan). When you enter into this agreement to borrow money, you begin to establish a credit history. Your credit history includes details about all of your credit accounts, including how much credit you have available, how much you are using, and how often you make payments on-time. It can also contain public records such as bankruptcies, judgements and liens against you.
So how do I get credit if I don’t have any?
One of the best ways you can start establishing credit is to apply for a secured loan. A secured loan means that some asset is used as collateral to protect the lender in the event that you do not repay the loan.
In the case of a secured credit card or line of credit, you make a cash deposit that becomes your line of credit. For example, if you deposit $500, you can charge up to $500. As you make payments over time, this information will be reported to the credit reporting agencies and your score will start to build.
Why not just apply for a bunch of credit card offers online?
You need to be careful when applying for any type of loan that you can trust the company you’re entering into an agreement with. Many credit card companies will bury important information in the fine print and charge astronomical interest rates – sometimes up to or over 30%! Make sure you understand exactly what you’re agreeing to and how it will help – or hurt – your financial goals.
You also need to be careful not to overdo it when trying to establish credit. Running out and opening 15 different department store credit cards won’t give your credit the boost you’re looking for. When it comes to credit, time is on your side – make your payments on time, every single month, and you’ll start seeing positive increases in your score.
What should I do next?
A great place to start for trustworthy financial advice is your credit union. Credit unions are not-for-profit institutions that typically have lower rates than banks and vow to put people over profits. At Industrial Credit Union, we offer free financial counseling and can help you find an option that works for your unique situation.
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Maintaining Credit
Even people with good credit need to take steps to maintain their score. Luckily, with a few tips and a little planning, you can set yourself up for success.
Pay On Time
Your payment history accounts for approximately 35% of your credit score – making it the single most important factor that’s included. Paying at least the minimum balance every month on your accounts is an easy but important part of establishing, improving and maintaining a good credit score.
The best way to make sure you don’t miss a payment is to set up automatic monthly payments. With Industrial’s Bill Payer service, you can arrange for your payment to be made on a specific date every month and decide how much to pay – the minimum balance, a flat amount or the full balance of the bill that arrives. And if your loan is with Industrial, it’s even easier. Automatic transfers are easy to set up and will ensure your payment always arrives on time.
Know How Much You're Charging
Keep track of how much credit is available to you, taking into account both installment loans and revolving lines of credit. Installment loans are for a fixed amount, such as for a vehicle, that are reduced to $0 as you make payments on the loan. Revolving lines of credit, such as credit cards, have a limit that can be paid and borrowed against continuously.
Next, make sure you know how much of your available credit you’ve used – or what the balance of your credit accounts is. Just because credit is available doesn’t mean you can afford to pay back what you charge, so stay on top of how much of your available credit you’re using.
Avoid Maxing Out Credit Accounts
Part of your score is calculated by determining how much of your available credit you’re using; when you use up the majority of your available credit, it reflects negatively on your score because it appears that you aren’t being responsible with your available credit.
Manage Your Debt-to-Income Ratio
Your debt-to-income ratio shows how much you spend on monthly bills versus how much you make. Maintaining a low debt-to-income ratio is important because it shows lenders that you’re likely able to pay back any new debt you take on. Maintaining a cushion in your debt-to-income ratio is also a critical component of any good budget so that you can put money away for vehicle repairs, college funds or a rainy day.
Monitor Your Credit Report
It’s important to pay attention to your credit report to make sure there are no errors that could affect you negatively. The Fair Credit Reporting Act (FCRA) requires each of the nationwide credit reporting companies — Equifax, Experian, and TransUnion — to provide you with a free copy of your credit report, at your request, once every 12 months.
For more information on how to order your report and report any inaccuracies, visit the Federal Trade Commission’s credit information site here.
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Repairing Credit
If your credit score is less than ideal, don’t be discouraged; there are things you can do to improve it and we can help.
The first thing to know is that there’s no magic fix for bad credit. Despite the advertisements you see that promise to fix your credit problems and erase any negative history you may have; the truth is that you can’t buy a Band-Aid for poor credit. The good news is that there are ways to repair your credit and they don’t start with a cheesy late-night commercial.
Start by reading our tips on maintaining credit above – this will help to understand the factors that influence your score the most and the actions you can take.
Next, take advantage of our financial counseling services. Industrial members have access to tools and personalized advice that can help you decide how to proceed and what steps to take to begin repairing your credit. This service is completely free for Industrial members.
For more information on credit repair from the Federal Trade Commission, click here.
