In today’s world, the ability to build quality credit can be very important. Whether it is the ability to obtain a credit card, mortgage, student loans or even rent an apartment or connect utilities without an extra fee, it is likely that your credit score will be evaluated at some point in their life.  To fully understand the different facets of credit, you must understand the different types of credit, how to establish credit, a credit report, and lastly your credit score.

#1- Types of Credit

The two main forms of credit include installment and revolving.  Installment is credit that is given in a single amount and repaid in payments over a specified period of time.  The three most popular forms of installment credit are student loans, auto loans, and mortgages.  The other type of credit is revolving credit.  Revolving credit is credit that is given as a limit, which carries over each month.  A minimum payment is due each month and interest is charged on the remaining balance.  Two examples of revolving credit are credit cards and store/gas cards.  While credit cards are a huge convenience, it is important to be responsible while using these resources because revolving credit typically carries a much higher interest rate than installment credit.

#2- Establishing Credit

Once you fully grasp the idea of the two different types of credit, you can begin to look at how to establish credit.  First, it is important to know that obtaining a loan without any credit history is not impossible; however, it is more difficult than having a credit score. Here are a few ways individuals with little to no credit can begin building credit: take out federal student loans, get a credit card or secured credit card, or take advantage of Experian’s new bill paying credit building program called Experian Boost. With the permission of the customer, Experian Boost allows individuals to connect Experian to their bank account for view only access to evaluate whether you are paying certain bills. It is important to know that both types of credit will help establish a credit score for you; however, installment credit builds credit scores slower than revolving credit due to the long-term nature of installment loans.

Many people choose to obtain a credit card when first starting to establish credit.  When choosing a credit card, make sure to investigate a few different things that the credit card company is offering.  First, you should look at the annual fee, which is the amount you must pay each year to use the card.  Second, you should look at the annual percentage rate (APR) which is the interest rate charged over a year on any leftover balance at the end of the month.  You should also make sure to understand whether the interest rate is variable or fixed; variable interest rates may fluctuate whereas fixed interest rates stay consistent.  Some companies even offer rewards such as cash back, airline miles, or merchandise. These can be very beneficial, as long as an individual is paying off their balance every month.

#3- Credit Report

A credit report is a detailed report on your credit history prepared by a credit bureau.  In order to see your credit report, you can visit www.annualcreditreport.com.  The federal government established this website to ensure that every individual can get one free report each year from each of the three different credit bureaus (Equifax, Experian, and Transunion).  This free credit report does exclude your credit score; however, you may pay a small fee to get your credit score.

#4- Credit Score

Lastly, when most people think about credit, they thing about the credit score.  In order to view your credit score for free, you can visit www.creditkarma.com. Please note that Credit Karma is a tool to give you an idea of what range your credit score is in which means the score shown to you may vary slightly from your actual score. If you would like your exact score, you must pay to receive it. The most common credit score used is the Fico Credit Scores, although Credit Karma uses the VantageScore 3.0. Both of these scales range from 300 to 850; the higher your credit score the better.  Factors that go into your credit score are payment history, credit utilization, length of credit history, credit mix, and new credit.

If you are interested in learning more about credit, please feel free to reach out to me at [email protected] or schedule an NEXUS Appointment with me: http://www.ronblueinstitute.com/schedule-an-appointment.