The Importance of Building and Managing Credit

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Understanding Credit: A Comprehensive Guide

Credit is an agreement between a lender and a borrower that allows the borrower to obtain funds, goods, or services now and repay them later. It also refers to your history of borrowing and repaying money. Having good credit—a history of repaying loans on time and as agreed—can make it easier to get approved for a range of credit products.

What Is Credit?

Credit is a financial term with a couple of definitions. One definition is the ability to borrow money and repay the balance over time, typically with interest. Another definition is an assessment of an individual’s borrowing history. Good credit means a history of responsibly borrowing and repaying debts, while poor credit may indicate a lack of established borrowing history or negative information in your credit history.

What Is a Credit Report?

A credit report is a financial record containing information about an individual’s history of borrowing and repaying debts. It includes data on how you’ve managed your current and past credit accounts. Credit scoring companies use this information to calculate your credit scores, and creditors may request your credit report as part of an application for credit, an apartment, utilities, a job, and more.

What Is a Credit Score?

A credit score is a three-digit number derived from data found in one of your credit reports. Lenders use your credit score as an indicator of how experienced and reliable you are at borrowing and repaying debt. The main credit scoring models are the FICO® Score and the VantageScore® credit score, both designed to predict the likelihood that a borrower will fall delinquent on payments.

FICO® Score Ranges

• 800 to 850: Exceptional
• 740 to 799: Very good
• 670 to 739: Good
• 580 to 669: Fair
• 300 to 579: Poor

How Is Your Credit Score Calculated?

Different credit scoring models use their own formulas for calculating your credit score based on the information in your credit report. Here’s a breakdown of what affects your FICO® Scores:

• Payment history (35%): The most influential factor, it records how you’ve managed your debt payments over time.
• Amounts owed (30%): This category is based on how much money you owe overall.
• Length of credit history (15%): Measures how long you’ve been using credit.
• New credit (10%): Takes into account recent hard inquiries and newly opened accounts.
• Credit mix (10%): Considers the variety of credit types you have.

Types of Credit

Credit products can be broadly classified as either installment credit or revolving credit.

Installment Credit

Installment credit is a lump sum of money that you borrow and repay over time with a set repayment schedule and typically a fixed interest rate. Examples include personal loans, car loans, student loans, and mortgages.

Revolving Credit

Revolving credit allows you to borrow up to a set credit limit. You’ll typically be required to make minimum payments each month, and carrying a balance will usually result in interest charges. Examples include credit cards, home equity lines of credit (HELOC), and personal lines of credit.

Why Is Credit Important?

Credit is crucial if you plan to borrow money for major purchases, such as a car or home. It also impacts other areas of your life, like lowering insurance premiums or setting up utilities. Higher credit scores help you access a wider range of credit with better terms.

How to Build Credit

Building credit is a long-term endeavor that requires time and consistency. Here are steps you can take to start building credit:

• Check your credit report: You can check your credit report for free through Experian to see your credit score and the information on your report.
• Apply for a credit card or loan: Consider starting with a credit product tailored to improving your score, like secured credit cards or credit-builder personal loans.
• Make on-time payments: Payment history is the largest factor in determining your credit score.
• Don’t max out your credit cards: Aim to keep your credit utilization rate below 30%.
• Don’t apply for credit too often: Avoid applying for new credit too frequently.
• Get credit for paying your bills: Use services like Experian Boost® to get credit for eligible bill payments.

Monitor Your Credit

Whether you anticipate needing to borrow soon or just want to establish credit as part of your financial journey, start by getting familiar with your credit. Consider signing up for free credit monitoring with Experian for an ongoing look at your credit progress.

For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We are here to help you with all your mortgage needs!

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