Credit and Debt
What is Credit?
You need established credit in order to buy a home or a new car. Credit is how you prove your trustworthiness to lenders, You build your credit by making your payments on time (trustworthiness). A good credit history is key to your financial success. With credit, you as the borrower can purchase items now and agree to repay the lender, generally with interest. Your “trustworthiness” is measured by a credit score, which can range between 300 and 850.
Check out these free interactive lessons:
Credit and Debt Management Course
Master Your Plastic Lesson
Infographic: How your credit score is calculated
Your Credit Score
Your credit score is made up of five components:
- Payment History – 35%
Paying your accounts on time is the most important component of your credit score.
- Amounts Owed – 30%
Just because you have a high credit limit, does not mean that you should max out your borrowing. Your debt-to-credit ratio looks at your available credit, and how much debt you are carrying. In fact, it’s a good idea to stay well below a 30% debt-to-credit ratio so your credit score doesn’t take a hit.
- Length of Credit History – 15%
A longer credit history will increase your credit score.
- Credit Mix – 10%
Diversify your credit, it will have a positive impact on your overall credit score. Examples are: student loans, credit cards, retail accounts, car loans, and mortgage loans.
- New Credit – 10%
Opening several accounts in a short period of time represents greater risk, especially if you do not have a long credit history.
* Certain actions such as late payments, student loan default, and a high debt-to-credit ratio will negatively impact your ability to open new lines of credit.
Credit Score Scale
Excellent (800 – 850): Easy approval process when applying for new credit, you will be offered the best interest rates. If you are in this range, you have demonstrated a long credit history of no late payments. You have a stable employment history, and various types of credit.
Very Good (750 – 799): If your score is in this range, you may qualify for better interest rates from lenders.
Good (700 – 749): For the most part, a “good” credit score is going to get you approved. You will be eligible for most loans, but will not be offered the best interest rates.
Fair (650 – 699): If you fall in this category, you are either working to rebuild your credit after some tough times, or you are doing well and have recently run into some trouble. You may be asked for down payments for some types of credit. Expect higher fees and interest rates.
Poor (600 – 649): Poor payment history, collection accounts, bankruptcy filings, or out of control credit card debt may put you in this category. You will most likely need a cosigner for any loans, and mortgage loans will unlikely be an option.
Very Bad (300 – 599): Only specialized lenders will lend to you, and your interest rate will be very high. If you fall in this category, you will have a hard time getting insurance and employers who check credit reports will not consider you.