Are you confused about how credit works? You’re not alone. Many Americans have very little understanding of how to manage credit and this leads to serious problems.
To get you prepared, here are the answers to five of the most common and important credit questions.
1. What do I need credit for?
Credit is an important part of your financial life. Your credit score is a factor whenever you need to borrow money.
This is important for big purchases like buying a new home or car or taking out a loan for your business.
Your credit can also impact other less obvious parts of your life.
When you rent an apartment, the landlord may make a decision based on your credit rating. Many employers also look at your credit before they will hire you.
This is why it’s so important to have good credit habits.
2. What is my credit score?
Your credit score is a three digit number that ranges from 300 to 850. A higher score is better.
Lenders use this number to determine your risk as a borrower. Someone with a high score will have an easier time taking out a loan and will likely be able to borrow money at a lower interest rate.
“Just stay patient and
pick up good habits.”
3. How is my credit score calculated?
Your credit score is determined by three independent rating agencies.
These agencies will look at whether you pay your bills on time, the amount of outstanding debt you have versus your credit limit, the types of loans you have, the length of your credit history and whether you’ve applied for any new loans in the recent past.
4. What are good credit habits?
The best credit habit you can pick up is always making your credit payments on time.
You don’t have to pay off all your balances at once, but at least make the minimum payments. This steadily builds up your credit score.
On the other hand, missing just one payment can drop your score by about 100 points.
You should also focus on keeping your card balances low, as the rating agencies don’t like seeing your accounts maxed out.
If you can, try to take out a variety of loans, like car loan and a credit card, as this helps compared to just having one type of debt.
5. Can I fix a bad credit score?
While it takes time, you can most definitely fix a bad credit score.
Every month you make your credit payments on time helps your score by a little bit, especially if you pay down your outstanding balances at the same time.
If you don’t have a credit card and can’t qualify for one, you can set up a secured credit card to repair your score.
Even a serious problem like bankruptcy will eventually get wiped off your credit report in seven to 10 years. Just stay patient and pick up good habits. Your situation will get better.
You don’t need to be a financial expert to understand credit. Keep this information in mind and you’ll be well prepared for the future.
Photo source: dimespring.com.