A fantastic primer on the basics of credit and how to make sure you rock your credit history by focusing on what matters. It’s easy!

Understanding Your Credit Made Simple

Understanding Your Credit Made Simple

Area of Study: CEEUsing Credit; JumpstartDebit and Credit

 

At some time or another, you’ve probably heard your parents chatting about credit. While these conversations may not mean much to you now, you’ll wish you’d listened closely when you get into the real world. So learn as much as you can early so that you’ll save yourself a ton of money (and possibly time) later in life.

What is Credit and Why Do You Need It?

So what exactly is credit? In a nutshell, it’s the ability to retrieve goods or services and pay for them at a later date.Click To Tweet

Beyond purchasing goods or services, there are other reasons why you may need to have solid credit:

  • Qualifying for a credit card, personal loan, or other debt product.
  • Receiving a loan for a new car or home.
  • Qualifying for a rental home or apartment.
  • Bypassing security deposit requirements for cell phones, utilities, and other service providers.
  • Qualifying for employment. (Yes, some employers will look at your credit report.)

What is a Credit Report?

According to myFICO, a credit report is a document that “contains your credit history as reported to the credit reporting agency by lenders who have extended credit to you.” In a nutshell, it’s all your credit activity since you’ve been active in the credit world. It contains identifying information, credit accounts, credit inquiries, public records and collection accounts.

You can retrieve your credit report from each of the credit bureaus, free of charge, at AnnualCreditReport.com.

When attempting to access your credit report for the first time, you may get an error message from the credit bureaus, indicating that there isn’t enough information present. Don’t fret. This just means that you have a thin file, or not enough information to generate a credit report or score.

What is a Credit Score?

A credit score is a three-digit number, ranging from 300 to 850, that is used to gauge the riskiness of a borrower. It is calculated based on various parts of your payment history, as shown in the graphic below. Although there are various scoring models on the market, also referred to as FAKO scores, the most prevalent model is FICO, as it is used by 90 percent of lenders. Your FICO score is made up of:

FICO-Percentages-Sidebar

What’s the Big Deal About Credit?

Since borrowing money usually comes at a cost, the better your credit score, the cheaper it is to make a purchase on credit.

And in some instances, having poor credit could cost you even when you wish to pay cash for a purchase. For example, if you’re attempting to turn your utilities on for the first time in your apartment, or purchase a new iPhone, you may be required to make a hefty security deposit.

Now I know you’re just a teen, and you may be thinking, “I have a way to go before any of this stuff matters.” You may be right if you’re on the younger end of the spectrum. However, I can assure you that being knowledgeable about credit and debt will help you be more proactive when borrowing funds, such as student loans, or borrowing on credit since you’ll understand how it all works and what costs are associated with it.

How to Start Building Your Credit

Credit scores take some time to build up but can be destroyed by a single mistake, such as making a late payment. Fortunately, most credit missteps won’t haunt you forever. Here are some ways to start beefing up your credit score:

  • Practice responsible debt-management before you even have any by paying your bills on time
  • Get a secured credit card and keep the balances low
  • Become an authorized user on your parent’s credit card
  • Pay your bills on time

Article Checklist

Key Words

  • proactive
  • lenders
  • FICO
  • borrower
  • riskiness
  • credit report
  • credit bureau
  • utilities
  • security deposit
  • credit card
  • personal loan
  • debt
  • credit
  • purchasing
  • goods
  • services

 

Questions
1. What is credit?
2. What is a credit card?
3. What is the difference between a debit card and a credit card?
4. Using the article and any other resources available to you, explain what FICO is.
5. How are credit scores measured?
6. What is the credit score number range?
7. What does it generally mean when you have a low credit score?
8. What companies offer to send you a credit report with your credit score?
9. How might someone establish credit?
10. Use at least 10 of the key words listed below the article to write a paragraph
starting with, “Steve wanted to buy a car . . .”

For more from author Allison Martin, click here