The material presented here is for educational purposes only and is not intended to be used as financial, investment, or legal advice.
Understanding Credit Basics: What You Need to Know
Maintaining a good credit score and history is imperative to your financial well-being — and it’s not as mysterious or scary as it may seem. Find out why credit is so important, who’s looking at your credit, how to read your credit report and what to do if you stumble along the way.
If you’re new to all things financial, credit can seem like a mystical concept. You’ve heard that it’s crucial to your success as an adult, and you know that there are such things as “good” and “bad” credit. You might have even been approved (or declined) credit based on your credit score. But how does it all work?
Here are a few of the basics:
Why should you use credit?
You might be wondering, why would I purchase something on credit if I can just pay cash? The short answer is that lenders base their decisions, in part, on your previous credit history. Becoming debt-free is a great aspirational goal! However, when you do end up needing credit for an emergency, or a larger purchase such as a home or car, having a solid, positive credit history built up is critical.
Who wants to see your credit report … and why?
When you apply for new credit, a lender will check your credit report and history. But potential creditors aren’t the only ones peeking at your history. Employers, utility companies, landlords and insurance companies are just some of the other sources allowed to view your credit history under The Fair Credit Reporting Act. Most are reviewing your borrowing history to determine whether to lend you money or provide a service.
Understanding your credit report
You can check your credit report through one of the three major reporting agencies (TransUnion, Equifax and Experian) or by requesting a free credit report online. Your credit report includes a history of each account listed, including open and closed dates, your credit limit or loan amount, and info that indicates whether you made on-time, late or missed payments each month. Your credit report also shows any bankruptcies and lists companies that have checked your credit recently.
Some credit reports also include an overall credit score that ranges from 300-850, which gives lenders a big-picture idea of how adept you are at using your credit wisely. A score of 700+ is considered good, while those with a score above 800 have excellent credit.
How to dispute inaccurate information
One of the most critical reasons to check your own credit is to see if there are any mistakes. After all, you don’t want to lose out on good loan rates and higher credit limits — or worse, get declined — because of an error on your report. If you do spot something fishy, you’ll likely need to contact the lender directly and request that they update their reporting with the credit bureaus. You may still need to follow up or contact the credit bureaus in writing afterward to make sure the changes are made.
Repairing damaged credit
If you’ve made a few credit mistakes along the way, don’t despair! Negative items such as a missed payment won’t stay on your credit report forever. There are also immediate steps you can take to repair the damage and improve your credit score, some of which can be found in our Financial Check-Up List or in one of these killer money workouts.
There’s plenty more to learn; we’re just scratching the surface here! Sign up for our free Understanding Credit Basics webinar to get expert answers to these and other questions about building and using credit. This one-hour online seminar is part of our Financial Wellness series, which covers topics important to your financial health.