Credit and financial education aren’t among the offerings in most high schools and colleges, and many of us wish we’d learned the basics far earlier.
In a 2018 Equifax survey, more than half – 52% — of respondents said they would willingly participate in a financial literacy education program if it were free and easily available, even though respondents were all 18 or over.
Credit can be complicated, but it’s never too late to build your credit and finance knowledge. March is Credit Education Month, aimed at encouraging consumers to learn more about the credit system, what credit can do for you and how you can best use it to your advantage. In that spirit, we’d like to offer answers to some of the credit questions we commonly receive.
Q: What is credit, anyway?
A: Many people rely on loans to help with big purchases such as homes or cars, and use credit cards to purchase other items, from a new pair of shoes to a daily coffee.
When you’re applying for that home loan or credit card, banks, lenders, other financial institutions, and credit card companies have one question in mind: how likely are you to pay it back? Lenders and creditors have their own lending criteria, which may include reviewing your credit reports to see your current and past accounts and payment history. Based on that review and other factors they consider, they’re able to classify you as a high risk, medium risk, or low risk borrower. Those consumers who are categorized as higher risk borrowers may receive higher interest rates or less favorable loan terms. Why does that matter? If you’re repaying a loan or even making credit card payments, higher interest rates may cost you more money over the long term.
You also have credit scores, which are three-digit numbers designed to represent the likelihood you’ll pay back a loan. Although there are many different credit scoring models, credit scores generally are calculated based on a method using content from your credit reports. Prospective lenders and creditors may check credit scores in response to your application for credit. Credit scores may also be checked when you request some utility services or mobile service; when you apply to rent a home or apartment; or for insurance purposes.
Q: So where do credit bureaus come in?
A: The three nationwide credit bureaus – Equifax, Experian and TransUnion – provide information used by lenders and creditors to make lending decisions. For instance, if you apply for a credit card, the credit card company may check credit reports or credit scores stemming from information provided by the three nationwide credit bureaus. It’s important to note the credit bureaus do not make lending decisions; those are left up to the lender or creditor. Each lender and creditor may have its own lending criteria.
Credit bureaus get their information from your existing lenders and creditors. But not all creditors report to all three bureaus – some may report to only two, one or none at all.
Q: What should my credit scores be?
A: Everyone’s financial and credit situation is different, and there is no “magic number” to strive for when it comes to credit scores.
Although credit score ranges may vary depending on the credit scoring model used, credit scores of 670 to 739 are generally considered good; 740 to 799 are considered very good; and 800 and up are considered excellent. Higher credit scores mean you have demonstrated responsible credit behavior in the past, which may make potential lenders and creditors more confident when evaluating your request for credit.
Q: How do my actions impact credit scores?
A: Again, everyone’s financial and credit situation is unique. But generally speaking, factors that may reflect favorably on credit scores include:
— Paying your bills on time, every time.
— Paying off debts as quickly as you can.
— Keeping a lower debt to credit ratio. That’s the amount of credit you’re currently using compared to the total amount available to you. If all your credit cards are near the limit, you may have a high debt to credit ratio. In general, lenders and creditors prefer to see lower ratios.
— Not applying for more credit than you need.
Factors that may negatively impact credit scores include:
— Making late payments or missing payments
— Applying for too many accounts in a short amount of time
— Having a home foreclosure or filing bankruptcy
— Exceeding your credit limit on credit cards
Q: Why should I check my credit reports?
A: First, it’s one way to make sure your personal and account information is accurate and complete. If you find something that you believe is inaccurate or incomplete, try contacting the lender or creditor first. If that doesn’t work, you can file a dispute with the credit bureau furnishing the report.
The second reason is related: To ensure there are no accounts on your credit reports that you don’t recognize or that might be the result of identity theft or fraud. You’re entitled to a free copy of your credit reports every 12 months from each of the three nationwide credit bureaus by visiting www.annualcreditreport.com.
And remember: checking your own credit reports will not impact credit scores.