Credit Basics Tips

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What is a credit account?

What Is A Credit Account?

After opening a new credit card or loan with a financial institution, you will have what is known as a credit account. The information about this credit account is then regularly reported and included on your credit history. The data shared includes:

1. payment history (late or on time);

2. total amount borrowed;

3. current amount owed;

4. monthly payment; and,

5. number of required payments.

   
What does my credit score do?

Credit Scores

To determine if you qualify for credit, a financial institution may review your credit scores. These scores are available through each of the three big credit reporting agencies – Experian, Equifax, and TransUnion. Each one uses a different formula to determine your credit score. In addition, since they operate independently of each other, the information available through each one will vary. A financial institution will often pull all three reports to make sure they have your complete credit history.

   
What is credit?

What Is Credit?

Credit is money given to you through some type of financial institution, like banks or credit unions. It is money that you have to repay with interest and sign a note obligating you to make regular periodic payments until a set final date.

Credit is made available as revolving debt through the use of credit cards. Revolving debt, like a line of credit, means that you have a set amount of money available. If you borrow against it, the amount available is reduced. As you make payments and pay down the debt, you increase the amount available up to your credit limit.

On the other hand, you may get an installment loan. You are given a set amount often to purchase a major item, like a car or house. You make regular payments on the loan until the debt has been satisfied.

   
1. If I cancel a "paid-off" Credit Card, will it affect my overall CREDIT?

Credit Card Cancellation

Your credit score is a result of many items on your report, and the number of open accounts is one of those things. The cancellation of your card, however, can have different effects on your overall score. It may raise your score if the score was low to begin with due to many open accounts. It may lower your score if the account wasn't open for very long. Then again, it may not have much of an effect at all. In the grand scheme of things, it is always best to close credit card accounts which are no longer in use, because the available credit might prove to be too much of a temptation.

   
What is revolving credit?

About Revolving Credit

Revolving credit is when a financial institution, or a store or credit card issuer backed by a financial institution, grants a borrower a line of credit that the borrower can tap as often as he or she likes up to a predetermined limit. The balance can be paid in full each month, or the borrower can pay the balance due in installments over the course of time. If the balance is not paid in full, the outstanding balance incurs interest, which the borrower must also pay back. Credit limits are determined based upon information the lender obtains during the credit check process.

Most credit cards are revolving lines of credit. You can charge up to your authorized limit, and you have the choice of paying your balance in full or paying the minimum monthly payment. If you pay less than the full amount due, the outstanding balance accrues interest, which you must also repay. A home equity line of credit is another example of revolving credit—and not to be confused with a home equity loan. Home equity lines of credit function similarly to credit cards, whereas a home equity loan requires a fixed monthly payment over a set period of time to pay off the balance. Such fixed payment loans, including car loans, are called installment loans.

   

Responsible Credit

It is impossible to escape the media mantra that U.S. consumers are drowning in credit card debt. However, using your credit card—responsibly—can be the No. 1 way to build good credit. So what constitutes “responsible” credit card use? For starters, don't max out your credit card. When creditors look at your credit report, they pay attention to how much of your available credit you have used and how long it takes you to pay off the balance. A good rule of thumb is to keep your balance at or below 30% of the card's limit. It's best to keep your balance well below 30% of the account's credit limit, or pay it off in full each month.

   
What is a credit report?

About Credit Reports

A credit report is a compilation of information that serves as a persistent record of how you use, abuse and manage your credit responsibilities. It includes basic information about you, such as your name, address, telephone number, Social Security number, date of birth, and employment history. It also includes information on your credit payment history as well as public information such as tax liens, court judgments, and bankruptcies, if any. Credit reports are used by potential businesses and lenders to help determine your creditworthiness. If your credit report is generally positive, you will most likely qualify for better terms on any credit for which you apply. The federal government recently enacted legislation allowing consumers access to a free credit check once every 12 months from each of the three main credit bureaus. For more information, or to get information on an free instant credit report, visit www.annualcreditreport.com.

   
What is a loan?

About Loans

A loan is a form of credit in which you can get money for small or large purchases or other purposes. Some loans are secured, while others are unsecured. A secured loan is one that is backed by the borrower's property. For example, a mortgage loan is backed by the borrower's home. That means that if the borrower fails to pay the mortgage loan according to the agreed upon terms, the lender can seize the home and sell it to recover the money it loaned to the borrower. An unsecured loan is one that is not backed by any property. For example, some banks and credit unions will loan small amounts of money to customers without requiring the customer to pledge any personal property to back the loan. That means that if the customer fails to pay back the loan according to the agreed upon terms, the only recourse the lender has to recover its money is to pursue collection activities against the customer. All reputable lenders require customers to submit to a credit check. Some loans, such as mortgage loans, require borrowers to submit not only to a credit check but to a much higher degree of scrutiny since the amounts loaned are generally so large.

   
What is credit?

About Credit

You've probably heard the phrase, “Give her the credit she's due,” or “You deserve credit for a job well done.” Well, the notion of credit for a job well done extends beyond your personal, academic, or professional achievements and into your financial life. In the financial sense, credit is an agreement between a lender—a bank, credit union, credit card issuer, utility company, or other institution that has a financial stake—and a borrower. The lender agrees to grant the borrower purchase power, usually in the form of cash or a line of credit. The borrower agrees to repay any sums borrowed plus interest. Lenders will perform a credit check to determine if the borrower is creditworthy. There are degrees of creditworthiness. If the borrower has a positive credit profile, the terms of the credit will be more favorable than for those who have negative information in their credit profile.

   
Are there different types of credit?

Types of Credit

There are several types of credit. The most common types of credit include loans and revolving credit, installment credit, and credit cards. Within each of these types of credits, there is both secured and unsecured credit. Secured credit is when the borrower agrees to back the credit agreement with either a deposit or real property, such as a car, house, or other property. Unsecured credit is when the borrower is granted credit privileges without having to pledge a deposit or property. Most creditors will require a credit check be completed to determine a borrower's creditworthiness.

   
Where can I learn more about credit?

Credit Literacy and Education

If you would like to learn more about credit and how to properly manage it, you should visit the Web site for The Foundation for Credit Education Consumer Information Bank. It includes resources on basic money management and the wise use of credit. Another great resource to learn about credit is the National Foundation for Credit Counseling, a nonprofit organization of credit counseling professionals that offers consumer debt advice. If you need credit counseling, you can use the organization's Web site member agency locator to find a credit counselor near you.

   
What is a FICO score?

About FICO Scores

FICO stands for Fair Isaac Corporation, the company that developed the credit scoring software used by the U.S and Canadian credit bureaus. However, FICO is just one type of credit score. There are hundreds of other kinds of credit scores developed for consumer, busineses, insurance companies and other purposes that vary from the basic FICO score. While there are hundreds of smaller, regional credit bureaus across the United States, there are three main national credit bureaus: Experian, Equifax, and TransUnion. These credit bureaus report your FICO scores to lenders.

   
What is installment credit?

About Installment Credit

Installment credit is an agreement in which a merchant or lender allows a consumer to take and use merchandise in exchange for a promise to pay for it over time. The consumer may make a down payment, such as with a car purchase, and signs a contract that specifies the interest to be paid, the timeframe within which the item must be paid for, and any penalties the consumer will incur in the event he or she defaults on the terms of the agreement. Payment is made in a specified number of equal payments called installments. Installment loans include car loans, mortgages and student loans.

   
What is service credit?

About service credit

Service credit is an arrangement between a utility and a customer in which the utility delivers a service—gas or oil, electricity, water, or sewer service to name a few—in exchange for a monthly payment by the borrower. The payment may be payment in full for services delivered in that month, or they may be a fixed budget amount with a “catch-up” payment made at the end of the term. Service credit isn't reported to the credit bureaus unless you miss payments or the debt is sold to collections. If the customer has overpaid during the course of the term, which is usually a 12-month cycle, the service provider refunds the overpayment to the customer. Most service creditors now require customers submit to a credit check before granting credit privileges.

   
What is credit management?

Credit Management

Many consumers are great with their finances, but others just don't know how to keep them from going out of control. If your spending is going way beyond your means, you may need to consider credit management. This works by first reviewing your income and expenses. T hen, determine what you can really afford and set up a realistic budget. To keep from becoming overextended, you need to stick with the plan and don't let your spending get out of control.

   
Should I get credit through a bank?

Credit Bank

When you are looking for a place to get your next credit card or auto loan, why not look to a credit bank? They have the know how and the experience to meet your financial needs. If you already have a relationship established with a bank, you may want to apply with them. Some banks offer discounted rates to current customers. It also may make the lending process simpler since they already have experience with you as a customer. In addition, if you have a checking or savings account with them, they may be able to give you a discount for automatic withdrawals for your monthly payment.

   
Should I use a credit counselor?

Using Credit Counselors

Having trouble controlling your debt? You may require the services of a credit counselor. This can help you better manage your debt rather than letting it manage you. A credit counselor will ask you to bring in information on all of your debts. Your income will also be analyzed. It may be recommended that you consider ways to reduce your debt – like downsizing your home or car. A plan is developed which you need to follow to help you gain control over your financial situation.

   
What is a credit company?

Credit Companies

Credit companies are everywhere with offers to extend you credit. Carefully review the terms offered to you before accepting an offer like this. Make sure you know if there are prepayment penalties, as well as the interest rate, fees charged and any other loan terms. It is also important to understand the penalties and processes that they may follow if you fail to make your payments as required.

   
How does my FICO score affect me?

FICO and Your Finances

There are three credit bureaus - Equifax, Experian and TransUnion. Each credit bureau maintains a unique credit report on each individual. Your credit scores are calculated based on the information on your report, so it's possible to have three very different credit scores.

The credit bureaus report these scores to lenders who may be considering granting credit to an individual. While lenders don't rely solely on credit scores to determine creditworthiness, the credit scores do have a significant impact on whether a person is approved for credit, how much credit the individual qualifies for, and what the interest rate will be on that credit. It is important to note that credit scores are not etched in granite. They can change for better or for worse, depending on an individual's payment history, amount of debt, and other factors. It's best to know your credit score before applying for any credit. If you have been denied credit based on information a lender obtained from a credit bureau, you are entitled to a free credit report. You will be notified in writing by the lender of which credit bureau was used so you can then request your free credit report. Read it carefully. It's possible there is incorrect information that resulted in your credit application denial.

   
What is a credit application?

Credit Application

In order to request a loan or credit card, you may first be required to complete and submit a credit application. The information you provide on this form includes name, address, employment history, date of birth, social security number, salary and current credit information. The information you provide helps the lender request a copy of your credit report. The information you provided on the credit application is then compared to what is on the credit report. You may be asked to explain any inconsistencies.

   
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