Credit and Debt
What you should know about credit
Most people are familiar with credit cards, but the term “credit” applies to more than just the plastic card you can use to make purchases.
Credit is your financial trustworthiness. It determines how confident a company can be in your ability and intention to pay off your debts.
Good credit is an indication that there is a history of financial responsibility, which can make it easier to borrow money at lower interest rates. Bad credit, on the other hand, can make it very difficult to get a car loan, a credit card, a place to live, and sometimes even a job or car insurance.
Most creditors look at your credit score to determine whether your credit is good or bad. Your credit score is based on a calculation that takes into account:
- Your annual income
- Your debt
- Your bill payment history and any collections actions
- The numbers and types of loans and accounts you have
- Your credit limits, and what your total debt would be if you reached your total limits
Creditors then use your score to determine the level of risk you pose to them. They’ll conclude that if you have a low score, you’ll be less likely to make timely payments and more likely to default on the loan.
Credit scores are reported by three major credit bureaus: Experian, TransUnion, and Equifax.
What’s in a credit report?
A credit report will contain the following information:
- Name, address, phone number, social security number
- Past address(es) and employers
- Your spouse’s name, if applicable
- Lender names and account numbers
- High balances, current balances, and credit limits
- Loan terms and payment history
- Whether you have had any charge-offs or repossessions
- Who has requested your credit report in the past 24 months
The credit bureaus also collect information from courthouse and registry records, so the report may include bankruptcies, tax liens, judgments, or even criminal proceedings.
Correcting and improving your credit report
You should regularly check all of the information in your credit report for accuracy, and dispute any incorrect information directly with the credit bureau that provided the report. They will open an investigation and advise you on how to proceed. You will also want to close any inactive accounts.
There are also two important steps you can take to start repairing your credit if your score is low:
- Pay down your debt.
- Pay your bills on time.
Why? Because it is used to determine the interest rate and type of loan a creditor will be willing to give you. If you are about to apply for credit — especially something significant like a mortgage—find out your credit score in advance. Then you can correct any errors and start improving your score.
Next, find out about taxes.