Written by Carrie Johnson (former SDSU Extension Family Resource Management Specialist).
Credit Report | Credit Score
Credit is the trust given to another person for the future payment of a loan. Credit is a contract. The creditor loans money, you buy something, and you pay the creditor back. When a person signs an application for credit, he/she is agreeing to all terms of the contract.
The five C’s of credit are used by lenders to determine how risky it is to lend money to the consumer:
- Character: credit history and character reference.
- Capacity: steady full-time employment, current living expenses, and other financial obligations.
- Capital: current status of savings and investments and available collateral (assets you own).
- Collateral: Assets that a borrower offers a lender to secure credit.
- Conditions: Terms of the loan, such as, principal and interest rate.
Banks, credit unions, and retail stores are the main source of credit.
There are three major types of credit:
- Installment credit allows the borrower to borrow money and repay the amount in equal installments over a specific period of time. An example of installment credit is an auto loan.
- Revolving credit allows the borrower to borrow a pre-established amount repeatedly as long as the account is in good standing. Repayment is either made in full or by partial payments that is subject to interest and/or fees. Credit cards are a form of revolving credit.
- Open credit is a hybrid of installment and revolving credit. There is no pre-established credit limit or payment amounts. However, the borrower must repay the entire balance every month.
There are additional types of credit that often carry higher fees and interest. Some of these are payday loans, car title loans, pawn loans, and tax refund anticipation loans.
Credit Fee Terms
Understanding all of the fees that are associated with credit can be a little difficult. Below is a short list of the most used fee terms you may come across when obtaining new credit.
- Annual Fee is a term used if there is a fee charged by the creditor on a yearly basis to use their credit product. This is typically associated with credit cards.
- Annual Percentage Rate (APR) represents the actual yearly cost of funds over the term of the loan. This includes any fees or additional costs associated with the transaction.
- Minimum payment refers to the lowest amount you must pay each month to stay current on your bill.
- Late/over limit fees are charged by creditors in the event that a payment is late or the consumer goes over their credit limit.
- Grace period is different dependent upon the type of credit (installment or revolving). A revolving credit (credit cards) grace period is the number of days you have to pay off your bill in full before interest is charged on the purchase. On installment credit (mortgage, auto loan, student loans, etc.) the grace period is a set amount of days you are allowed to be late without receiving a late fee.
Your credit report contains information about your credit history and the status of your credit accounts.
The four basic types of information on a credit report are:
- Identification and employment information.
- Credit history.
- Inquiries made about your credit.
- Public record information (judgments, tax liens, and bankruptcy).
There are three nationwide consumer reporting agencies:
Every consumer is entitled to one free credit report from each of the agencies in a 12-month period. You can visit the Annual Credit Report website and print each of your reports. You can receive all three reports at the same time, but to stay on top of possible mistakes on your report and view your information periodically order one every four months. There are other situations in which you may qualify for a free credit report: if a company takes adverse action against you; you are unemployed and plan to look for a job within 60 days; you are on welfare; or your report is inaccurate due to fraud or identity theft.
Your credit score is something different than your credit report. Credit scoring is a system creditors use to help determine credit worthiness. Credit scores range from 300-850, the higher your score the less risky you appear to lenders. Each of the three credit reporting agencies have their own scoring system, each number will be different for each agency. A consumer’s FICO (Fair Isaac Corporation) is the moste widely used and accepted credit score available.
There are five elements that make up a FICO score:
- Have you paid past credit accounts on time?
- How many accounts show late payments?
- Details on late or missing payments.
- How late were they? How much is owed? How recent?
- Public record and collection items
- The amounts owed on all accounts and on different types of accounts.
- What types of accounts have balances?
- How many accounts show balances?
- How much of total credit line is being used on revolving credit?
- How much of an installment loan is still owed compared to the original amount?
Length of Credit History
- How long have your credit accounts been established?
- How long has it been since you used certain accounts?
Taking on More Debt
- How many new accounts do you have?
- How long has it been since you opened a new account?
- How many recent requests for credit have you made as indicated by inquiries to credit reporting agencies?
- Length of time since credit report inquiries were made by lenders.
- Whether you have good recent credit history following payment problems.
Healthy Mix of Credit
- What kinds of credit accounts do you have?
- How many of each type of accounts do you have?
Improving Credit Score
Potential creditors are most interested in your normal payment behavior. The will look upon you more favorable if you have paid your bills in full and on time. If you have missed a payment or payments, get them up-to-date. Try to get credit card balances below 30% of available credit. Do not just close unused credit accounts; try to keep older accounts to help boost your score.
Avoid credit repair agencies that charge a fee to improve your credit score. You can dispute mistakes or outdated items for free, but there is no legal way to remove correct negative information (only the passage of time can assure its removal). Be aware that paying off a collection account or closing an account on which you previously missed a payment will not remove it from your credit report.
- Building a Better Credit Report: Learn how to legally improve your credit report, deal with debt, spot credit-related scams, and more. Federal Trade Commission.
- Credit Repair: How to Help Yourself: Cautions consumers about companies that charge hundreds, even thousands of dollars, but don’t deliver on their claims. Truth is, no one can legally remove accurate negative information from a credit report. Federal Trade Commission.
- How to Dispute Credit Report Errors: Explains how to dispute and correct inaccurate information in your credit report. Includes a sample dispute letter. Federal Trade Commission.
- Your Access to Free Credit Reports: Learn how to order a free copy of your credit report from each of the nationwide consumer reporting companies. Federal Trade Commission.
- Credit and Your Consumer Rights: Explains credit laws that protect your right to obtain, use, and maintain credit. Offers practical tips to help you solve credit problems. Federal Trade Commission.