Credit Basics
What is credit?
The ability to borrow money or access goods or services with the agreement to pay for them later.
What is a credit card?
A credit card is a financial tool that allows you to borrow money from a bank or credit card company to make purchases, with the agreement to repay the borrowed amount later.
What does a credit score represent?
A credit score represents an individual's creditworthiness and the likelihood of repaying debts on time.
What is generally considered a "good" credit score?
A credit score in the range of 700 to 749 is generally considered "good."
What are the three major credit bureaus that compile credit reports?
The three major credit bureaus that compile credit reports are Equifax, Experian, and TransUnion.
Why is understanding Credit important?
Understanding credit is essential because it affects your financial options, such as loan approvals and interest rates, and can impact your overall financial well-being.
Explain what a mortgage is.
A mortgage is a type of loan used to purchase real estate, such a
What is the primary factor that influences your credit score?
Your payment history is the primary factor that influences your credit score. It reflects whether you've paid your bills on time or had late payments.
True or False: A longer credit history is generally viewed positively.
True. A longer credit history is often viewed positively because it provides more data for assessing creditworthiness.
Explain the significance of the "credit utilization" factor in your credit report.
The "credit utilization" factor in your credit report is significant because it measures the percentage of your available credit that you are currently using. Maintaining a low credit utilization rate (typically below 30%) is generally seen as positive for your credit score, as it suggests responsible credit management and can improve your overall creditworthiness.
What is the definition of creditworthiness?
Creditworthiness refers to how trustworthy you are as a borrower, indicating your likelihood to repay debts on time.
Name one advantage of using store credit.
One advantage of using store credit is that it may offer special discounts or financing deals specific to that store, making it more appealing for certain purchases.
True or False: A higher credit score usually leads to higher interest rates on loans.
False
A higher credit score typically results in lower interest rates on loans because it indicates lower credit risk.
Name one factor that can negatively impact your credit score.
One factor that can negatively impact your credit score is making late payments on bills or loans.
What is the purpose of a credit report?
The purpose of a credit report is to provide a detailed record of an individual's credit history and financial behavior, including their credit accounts, payment history, and public records. Lenders, creditors, landlords, and other entities use credit reports to assess an individual's creditworthiness when making lending, rental, or financial decisions.
Define credit utilization.
Credit utilization is the percentage of your available credit that you're currently using. It's calculated by dividing your credit card balances by your credit limits.
Stay under 30%
What type of credit is typically used for buying a car?
Car loans are typically used for buying a car. These loans are specifically designed for financing vehicle purchases.
What is the range of credit scores, with 850 being the highest?
The range of credit scores typically extends from 300 to 850, with 850 being the highest possible score.
Why is it important to monitor your credit score?
It's important to monitor your credit score to ensure accuracy, detect errors, and track your financial progress. Monitoring can help you identify and address issues that may negatively affect your credit.
What is a favorable interest rate?
3% or below
A favorable interest rate is one that is low and advantageous to the borrower. It results in lower borrowing costs and, in the context of loans or credit cards, indicates that the borrower will pay less in interest over the life of the loan or for carrying a credit card balance. Favorable interest rates are typically offered to individuals with good credit histories and lower credit risk.
Explain how credit limits work on credit cards.
Credit limits on credit cards represent the maximum amount you can borrow or charge, determined by the issuer based on factors like credit history and income, with responsible use potentially leading to limit increases and exceeding the limit resulting in penalties and credit repercussions.
Describe the potential consequences of late payments on a credit card.
Late payments on a credit card can result in consequences such as late fees, increased interest rates (APR), a negative impact on your credit score, potential credit limit reductions, and limited access to future credit opportunities.
Which credit score range is generally considered "excellent"?
A credit score of 750 or above is generally considered "excellent."
How can you improve a poor credit score over time?
You can improve a poor credit score over time by practicing responsible financial habits, such as paying bills on time, reducing credit card balances, and managing debt responsibly.
What are some practical tips for building and maintaining a healthy credit history?
Payment History: Your payment history is the most significant factor in determining your credit score. It reflects whether you've paid your bills, loans, and credit card balances on time. Late payments or missed payments can have a negative impact on your score.
Credit Utilization: Credit utilization, or the amount of credit you're currently using compared to your credit limits, is another critical factor. Keeping your credit card balances low in relation to your available credit (typically below 30%) is generally favorable for your score.
Length of Credit History: The length of your credit history measures how long you've had credit accounts. A longer credit history is often viewed positively, as it provides a more extended record of your credit management.
Types of Credit: Lenders like to see a mix of credit types, such as credit cards, installment loans (like auto loans or mortgages), and retail accounts. A diverse credit mix can be beneficial for your credit score.
New Credit Inquiries: Opening multiple new credit accounts or making numerous credit inquiries in a short period can negatively affect your credit score. It can indicate higher credit risk to lenders.