Credit is part of your financial power. It helps you to get the things you need now, like a loan for a car or a credit card, based on your promise to pay later. Working to improve your credit helps ensure youll qualify for loans when you need them.
There are many types of credit. The two most common types are installment loans and revolving credit.
Installment Loans are a set amount of money loaned to you to use for a specific purpose.
Revolving Credit is a line of credit you can keep using after paying it off. You can make purchases with it as long as the balance stays under the credit limit, which can change over time. Credit cards are the most common type of revolving credit.
Not all credit cards are the same. Make sure you explore all pros and cons of credit cards when choosing the right one for you.
Interest is a cost of borrowing money. Lenders generally charge a certain percentage of the average daily balance of your account, which is called an interest rate. This interest rate is applied to your outstanding balance on a monthly basis. Credit cards may have different interest rates for different types of activities, like purchases or cash advances, so make sure you read the fine print.
Many credit cards charge fees, but not all cards charge the same fees. Take care to fully understand what fees you are responsible for.
Annual fees are similar to a membership fee—you are charged once per year just for having a card. Return to most common fees navigation
Transaction fees are collected when a card is used for a cash advance. Return to most common fees navigation
Balance transfer fees are fees you pay to transfer balances from one credit card to another. Return to most common fees navigation
Late payment fees are charged if a payment is received after the due date. Return to most common fees navigation
Over-credit-limit fees are assessed if your spending exceeds the credit limit set for your account. Return to most common fees navigation
Return item fees are charged if your payment is returned for insufficient funds. Return to most common fees navigation
Your credit limit is the maximum balance you can have on your credit card. It is determined by your lender, based on your credit history and income.
Credit Score Factors: How Your Score Is Calculated
The three major credit reporting agencies in the U.S. (Equifax, Experian, and TransUnion) report, update, and store consumers’ credit histories. While there can be differences in the information collected by the three credit bureaus, five main factors are evaluated when calculating a credit score:
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Payment history counts for 35% of a credit score and shows whether a person pays their obligations on time. Total amount owed counts for 30% and takes into account the percentage of credit available to a person that is being used, which is known as credit utilization. Length of credit history counts for 15%, with longer credit histories being considered less risky, as there is more data to determine payment history.
The type of credit used counts for 10% of a credit score and shows if a person has a mix of installment credit, such as car loans or mortgage loans, and revolving credit, such as credit cards. New credit also counts for 10%, and it factors in how many new accounts a person has; how many new accounts they have applied for recently, which result in credit inquiries; and when the most recent account was opened.
Kathryn Hauer, CFP, Enrolled Agent Wilson David Investment Advisors, Aiken, S.C.
If you have many credit cards and want to close some that you do not use, closing credit cards can indeed lower your score.
Instead of closing accounts, gather up the cards you don’t use. Keep them in a safe place in separate, labeled envelopes. Go online to access and check each of your cards. For each, ensure that there is no balance and that your address, email address, and other contact info are correct. Also, make sure that you don’t have autopay set up on any of them. In the section where you can have alerts, make sure you have your email address or phone in there. Make it a point to regularly check that no fraudulent activity occurs on them, since you aren’t going to be using them. Set yourself a reminder to check them all every six months or every year to make sure there have been no charges on them and that nothing unusual has happened.
VantageScore is a consumer credit rating product developed by the Equifax, Experian, and TransUnion credit bureaus in 2006 as an alternative to the FICO Score, created by the then-Fair Isaac Corp. in 1989.
VantageScore was developed by the same three credit rating agencies that are used by FICO to develop its scores. Equifax, Experian, and TransUnion claim that VantageScore uses machine learning techniques to generate a more accurate picture of a consumer’s credit.
FICO Scores remain the most popular credit score, employed by about 90% of all lenders. However, the use of VantageScore has been increasing, growing by about 20% annually since June 2015, based on studies conducted by consulting firm Oliver Wyman. The most recent study available, looking at July 1, 2018, to June 30, 2019, found that approximately 12.3 billion VantageScores were used by more than 2,500 users. Credit card issuers were the most prolific users of VantageScore, followed by banks.
There are several points of difference between FICO and VantageScore. FICO creates a single bureau-specific score for each of the three credit bureaus, using only information from that bureau. As a result, it is actually three scores, not one, and they can vary slightly, as each bureau will have different information about a consumer. A VantageScore is a single, tri-bureau score, combining information from all three credit bureaus and used by each of them.
TransUnion, Experian, and Equifax – these all provide information about a borrowers credit history. The reports prepared by these authorities are forwarded to FICO who further prepare that borrowers credit scores.
These credit scores are helpful for a person while seeking loans. If the scores are positive and good rating, the loans are easily given. If anyone has a bad rating, then they will either not get loans or if they get, it will be at very high interest rates.
What Is a Credit Bureau?
A credit bureau, also known in the U.S. as a credit reporting agency, is an organization that collects and researches individual credit information and sells it to creditors for a fee, so they can make decisions about extending credit or granting loans.
FAQ
What is the function of Equifax?
What are the three most common credit reporting agencies?
What do credit scores mean?
