Establishing Credit 

Understanding Credit and Why It's Important

Key learning points: 

• Credit is the ability to access money, goods, or services now and pay for them in the future. 
• The three major credit bureaus (Experian, Equifax, and TransUnion) track and analyze transactions to calculate your credit score, a 3-digit number rating your financial reputation. 
• Your credit report, credit history, and credit score can impact your ability to get a loan, rent a house, finance a vehicle, or get a job. 

Credit is a vital component of your overall financial wellness. It allows you to make major purchases like buying a home or financing a car. It also measures your financial reputation in the eyes of creditors, retailers, and potential employers. 

What is Credit?

Credit is the ability to access goods, services, or funds now and pay for them in the future. You can also think of it as your capacity to repay your debt obligations as promised.

If a lender is confident in your ability to repay your debts, you're more likely to qualify for financing like personal loans, mortgages, or auto loans. You may also get approved for a lower interest rate, since you present less of a risk to a potential lender.

How is credit determined?

If you have a solid record of repaying your debts on time and managing how much borrowing you are doing, creditors will likely say you have good credit, or that you're creditworthy. 

Creditworthiness helps lenders feel confident you'll repay your debts, plus any fees or interest charges.

You build your credit over time as you borrow money and repay your lenders. The three major credit bureaus track these borrowing and repayment habits. Then, they add certain transactions to your credit report, such as new loan applications, recently opened accounts, and your existing balances. 

The credit bureaus document these transactions and use the information to calculate your credit score, a 3-digit number that rates your financial habits and assesses your creditworthiness.

Your Credit Report

Your credit report is a detailed document that contains data about both your current (open) and closed accounts. Examples of data fields included on a report include: 

• Past and current loans (name of lender)
• The amount and age of your credit lines
• The total amount you've borrowed and what you currently owe
• The monthly payments received on each loan or line of credit
• Your repayment history including any late payments (30+ days)
• Credit inquiries from the last 2 years
• Debts in default or collections
• Bankruptcies or Foreclosures

Types of Credit

Revolving Credit: An Overview

Revolving credit is a type of credit account that lets you borrow up to a certain limit on a recurring basis. As you pay off your borrowed amount, your available credit replenishes, allowing you to borrow again.

Key Characteristics of Revolving Credit

• Credit limit: Revolving credit comes with a predetermined credit limit, which represents the maximum amount you can borrow.
• Repayment: The repayment of revolving credit is flexible. You're required to make minimum monthly payments, which is typically a percentage of your outstanding balance.
• Interest and fees: Depending on the terms of the account, interest and other finance charges may apply — but you can often avoid these charges by paying your balance in full each month.

Examples of Revolving Credit

• Credit cards
• Personal lines of credit
• Home equity lines of credit (HELOC)

Installment Credit: An Overview

With installment credit, borrowers receive a fixed amount of money that they repay through fixed payments over a certain period.

Key Characteristics of Installment Credit

• Loan Amount: With an installment loan, you borrow a lump sum of money upfront.
• Repayment Schedule: Borrowers typically repay installment credit through fixed monthly payments spread over several months or years.
• No Replenishing Credit: Unlike revolving credit, installment credit doesn't replenish as you pay off your balance.

Examples of Installment Credit

• Personal Loans
• Auto Loans
• Mortgage 

Service credit

Service credit comes from service providers, like your utility companies or cell phone provider. In most cases, you establish a service credit line ahead of time, use the services or utilities for a predetermined period, and then repay providers at the end of the billing cycle.