Why Credit Matters
What is credit, and why is it so important? It’s your reputation as a borrower, made up of information about your borrowing and repayment history. Good credit histories generate good credit scores and are rewarded by lenders with lower rates and favorable terms; bad credit can cost you.
Your spending habits—including purchases made with credit cards, as well as payments for insurance, car loans, utilities and cell phone bills—are the blueprint for your credit history and can make or break your reputation as a borrower. Paying bills on time and in full is key to good credit and makes it easier for you to secure a mortgage, car loan or private student loan in the future. Paying late or defaulting on payments is a red flag for lenders. If you have poor credit history, you’ll likely be seen as a risk and may not get a loan or credit card, or may be given one with a higher interest rate.
In addition to helping you get a loan, credit can affect other aspects of your life, from renting an apartment to getting hired for a job. Why? Just like lenders, if landlords or employers see a low credit score, they may perceive you to be financially irresponsible and too risky to take on.
Credit: Histories, Reports & Scores
For many, the terms “credit history,” “credit report” and “credit score” may appear interchangeable. In fact, they are three separate entities that are directly related to one another.
- Credit History: an unofficial record of your debts and repayments
- Credit Report: an official record of your credit history collected from sources like lenders, utility companies, landlords and collection agencies, and compiled by the three credit bureaus, Equifax®, Experian® and TransUnion®
- Credit Score: a statistically calculated numeric value indicating your creditworthiness based on the information contained in your credit report. While there are several credit-scoring formulas, FICO® (the acronym for Fair Isaac Corporation, the company that provides this model to financial institutions) is the most widely recognized. Scores range from 300 to 850, with under 400 typically indicating very poor credit and above 670 demonstrating you’re a responsible borrower.
Scores are available for lenders, landlords and others to use in assessing if you’re a good financial risk to take on. Ranges of scores are often translated into quality ratings, such as good, fair and poor. While ranges may vary by lender, here is an example of how scores may be broken up:*
*Scores are based on the Understanding FICO® Scores Booklet. Lenders may use other qualifying ratios and factors when approving loans. Speak to your lender for more information.
How Your Credit Score is Calculated
Common Credit Myths
Credit facts and fallacies are abundant, and being able to separate truth from myth can go a long way in helping you keep your credit out of jeopardy. When it comes to credit, knowledge is power. Let’s take a look at some of the most common credit myths and get the real story.
Myth: The more money you make, the better your score.
Fact: Income has nothing to do with your credit score and isn’t even reported to the credit bureaus, so it’s not listed on your report.
Myth: Bankruptcy protection is perfect for people with large amounts of debt.
Fact: One of the great myths about bankruptcy is that it erases bad credit history. It doesn’t. Although declaring bankruptcy frees you from paying back all or part of your debt, the delinquent accounts aren’t deleted from your credit report. Instead, they’re added to show they were included in bankruptcy and can remain there between 7 and 10 years.
Myth: Once you’ve paid a past-due debt, it’s gone from your credit report.
Fact: Negative information and late payments remain on your credit report for seven years from the date of the initial late payment. The effects of these black marks on your credit score will, however, lessen over time.
You need a history of responsible credit use to establish a solid credit history and credit score.
Myth: Paying cash for everything helps your credit score.
Fact: Paying cash for everything isn't better than using credit responsibly. You need a history of responsible credit use to establish a solid credit history and credit score. If you don’t establish and maintain various types of credit accounts, your scores won't be as good as someone with a long history of responsible credit use.
Myth: Moving credit card balances around will hide debt.
Fact: You can’t hide debt. Having many credit cards affects your credit, as does the amount of debt you carry. You can opt for a balance transfer to help you save money and pay off your loan faster by moving debt from a high-rate card (or cards) to a low-rate card.
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