Take Charge of Your Finances: Credit Clarified

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By Jhanay Davis, Editorial Intern

Credit is a word that is thrown around a lot in the life of a student-loan-seeking-undergrad. It isn’t really explained, just referred to. Now, the basics to credit have been compiled in this post to clarify the meaning of and use for credit.

Credit can be defined as the confidence in ability of a borrower to repay loans. Credit history and scores can determine someone’s eligibility, the amount they can borrow and the interest rate on a loan.

Credit is often referred to as the new cash. It is widely accepted in retail and some business establishments require that customers have a credit card to be served.

Credit reports give much insight on a person. They list many facts about a person’s life which include basic information such as full names, social security numbers, current and past jobs, addresses, and frequently used aliases. More in-depth details are reported such as: loans, payment patterns, payment defaults, bankruptcies, arrests and convictions.

Credit reports can help groups or organizations make informed decisions about entering into any transaction with a consumer. For example, employers can access credit reports prior to hiring individuals with their consent.

It is important to have satisfactory credit history because it can affect many day-to-day situations. Bad credit can lead to higher fees and rates, being declined for new accounts, no credit increases, as well as being rejected for jobs, apartments, and insurance. Because of the many things recorded on a credit report, it gives a somewhat accurate picture of how financially stable someone is.

According to bankrate.com, there are five factors that are used to calculate a credit score. They are:

•Payment history (35% — always pay on time, even if it’s the minimum)

•Outstanding debt (30% — less is best)

•Length of credit history (15% — the longer you’ve had credit, the better)

•Mix of credit (10% — consumers with a managed variety are better risks)

•New credit applications (10% — compensates for mortgage or car loan shoppers)

“Good” credit is considered a score of 720 and above based on a scale of 300 to 850.

Historically, consumers were not allowed access to their credit reports. However, since 2005, all consumers are entitled to a free copy of their credit report annually from all three reporting agencies –Equifax, Experian, TransUnion –according to the Federal Trade Commission. Also, consumers can purchase their report at any time through many online tools.