The term "credit" leaves a lot of us scratching our heads.
On one hand, we kind of know what it means, but on the other hand,
we don't understand how it works. On one hand, we know our credit
needs to be good, but on the other hand, we have no idea how to improve it.
So let's clear that up with simple layman's terms:
What is credit?
Credit is borrowed money… a loan. You receive the money
(or the item or the service) up front, then promise to repay it back in full,
with interest.
What is a credit score?
Your credit score is your reputation with
financial institutions for paying back loans. It is a number that financial
institutions use to determine how reliable you might be with repayment.
Financial institutions rely on credit bureaus to provide your credit report,
which includes your credit score and the details of your credit history. There
are three main credit bureaus: Equifax, Experian, TransUnion. Each agency will
have slightly different details in their credit reports, but there are usually
no drastic differences. By law, you are able to access your credit reports
from each of the three bureaus, for free, at least once per year by visiting www.annualcreditreport.com
What about FICO? What is that?
FICO is a formula for calculating credit scores. The FICO
scoring system was created by a company called Fair Isaac Corporation.
There are other formulas out there, but the FICO method is the most
popular in the US, and all three credit bureaus use it. For all
intents and purposes, your credit score and your FICO score are the same
thing. FICO scores range from 300-850. The higher the score, the
better.
What makes up my FICO score?
FICO scores are calculated from five categories. Read this article to see
the breakdown. It even uses a pretty pie chart.
I don't have credit. Is that bad?
Nope. No credit (aka "zero credit") is not the same as bad
credit. It does mean that you may not qualify for many loans until you
establish a good credit history. You can begin to build a good credit history
by opening a low-rate credit card with low credit limits,
a share-secured loan, or getting a co-signer for a small loan. Make your
payments in full and on time, and you'll be on your way.
How do I improve my credit score?
There's many ways you can do this. This article is helpful.