Understanding Credit: Program Recap

You can view a recording of this program on our YouTube channel.

What is Credit?

Credit is borrowed money that you can use to purchase goods and services when you need them.  You get credit from a credit grantor, whom you agree to pay back the amount you spent, plus any applicable finance charges, at an agreed-upon time.

There are 4 types of credit:

1. Charge cards/accounts
2. Revolving credit – credit cards, equity loans
3. Installment credit – mortgage, student loan, car loan
4. Service contracts – cable, utilities

Credit in and of itself is neither good or bad; it is how you utilize it that can have positive or negative impacts on your financial well-being.  Credit can be a convenient way of purchasing items, especially expensive items, without the need for cash.  However, credit is a loan and you will be paying more for that purchase in the long run.  Also, because of the convenience, it is easy to overspend with the appropriate means to pay back the loan effectively.

Credit Bureaus and Credit Reports

All of your credit information is compiled into a credit report by 3 different credit reporting agencies: Experian, Equifax, and Transunion.  Your credit report is made up of:

• identifying information (name, address, social security number)
• Job history (where and how long)
• Creditors and payment history (name of creditor and how long credit has been open)
• Legal actions (liens, collections, foreclosures, bankruptcy)
• Inquiries you initiated (whether personally or by a creditor with your permission)

Some of this information is permanent, while most negative reporting will eventually come off your report. A majority of negative information (past due payments, late payments, forbearances, etc.) falls off your credit report after 7 years. This also includes information related to matters in collection, which starts from the date of the first delinquency. However, if you have filed for Chapter 7 bankruptcy, that information lasts for 10 years. Any hard inquiries into your credit, such as for a car loan or mortgage, last 2 years and can drop your credit score by 10 points for each inquiry.

You are entitled to a free credit report every year from each of the 3 reporting agencies so it is best practice to request your report from a different agency every 4 months to ensure your credit report is accurate.  If there is an error with your report, you can dispute the error in writing to the credit agency.  The agency is required to investigate your dispute within 30 or automatically remove the disputed item from your credit report.  You can also get a free yearly credit report from https://www.annualcreditreport.com/.

Credit Scores

Credit reports and credit scores are often mistakenly assumed to be the same thing, but they are very different and focus on different aspects of your credit situation.  The most common credit score is the FICO score which is used by Experian.  Each credit reporting agency has its own scores and ways of calculating them.  As a rule of thumb, your credit score is made up of:

• Payment history – 35%
• Amounts owed – 30%
• Length of credit history – 15%
• New credit – 10%
• Credit mix – 10%

Your credit score is often utilized by creditors to determine interest rates while your credit report can be used to determine pre-qualified or pre-approval amounts.  Lenders, landlords, insurance companies, and even employers can all look at your credit score.  Generally, a credit score of 700 or higher is considered good and those in the high 700s and 800s will receive the best interest rates.  There is a new movement to include other information for consideration in your credit score, especially for those with little or no credit history, including payment history for service contracts, subscription services, as well as length of address history.

There are many different ways to establish or re-establish credit:

• Repay old debts through payment arrangements or settlements. Be sure to check that each account in your credit report is updated in a timely manner.
• Keep credit report accurate
• Become an authorized user on other person’s credit cards. If that person falls behind or stops paying however, then your credit will be negatively affected and you will be responsible for any balances.
• Have a co-signer for a small personal loan
• Apply for a secured credit card

If you are looking to Improve your credit score, try to:

• Repay old delinquencies
• Pay consistently on time
• Keep balances significantly lower than limit (50% or less)
• Keep oldest accounts active
• Limit number of open accounts
• Limit number of credit applications made

Maintaining Good Credit

So what are some ways you can maintain good credit?

• Create a spending plan and live within it
• Pay your bills on time, all of the time
• Have some credit, but not too much
• Have a mixture of credit types
• Keep credit card balances low
• Use caution when closing accounts
• Be aware of your debt-to-income ratios
• Contact lenders if you fall behind on payments

Having good credit stems from knowing your financial situation and having a plan for your money. One of the easiest ways it to track where your money goes:

• Write it all down
• Use a mobile or computer app to track expenses
• Keep receipts
• Use credit or debit cards
• Monitor ATM use

Another way to help maintain good credit is to delete your debt by reducing your interest rates, increasing payments, or aggressively tackle your highest debt amount first.

More Information

For more information about managing your credit or to discuss your personal credit situation, please reach out to the Credit Union of New Jersey for a consultation or contact Amanda Griffith directly at agriffith@cunj.org.

Be sure to place a credit freeze on your credit report by creating an account with each of the 3 credit bureaus – Experian, Equifax, and Transunion; this will protect you from identity theft and unauthorized lines of credit, yet it will not have any affect on your credit report or score.