What is Credit?
Credit is borrowed money that you are able to purchase everyday items with. For example, you can use a credit card for groceries, appliances, and clothes. At the end of each month you have to pay back the amount you spent to the credit card company. If you need a loan for a house or car and don't have cash on hand, you will most likely use credit. That's why credit is so important.
What is a credit score?
Credit score is a three digit number that predicts a persons creditworthiness. Credit lenders use this score to predict whether the person will pay back a loan or not. A credit score range is from 300-850. 850 is the highest and best score you can possibly achieve. The higher the score the more loans you will be able to receive.
What is a credit report?
Credit report is a thorough report on ones overall credit history. Credit bureaus collect information on an individuals and create a credit report. Once they create a detailed history, they sell or give this information to credit lending companies. All this information is used to help determine whether the loan applicant is worthy enough for a loan.
The Five Factors
The five factors that make up your credit score are payment history, credit utilization, length of credit history, new credit, and credit mix. Payment history is 35 percent of the total credit score. You create good payment history by paying on time and consistently. The next factor is credit utilization. This factor is 30 percent of credit score. To have good credit utilization one should maintain a moderate or low credit card balance. Next is length of credit history which makes up 15 percent of ones credit score. New credit makes up 10 percent of a credit score. A borrower should avoid opening too many credit lines. Lenders view this as someone who is in financial trouble and needs credit. Credit mix also makes up 10 percent of a credit score. Borrowers with good mix of credit and loans that are able to be paid off indicate a low risk borrower.
Building and Maintaining Credit
One way to get started on building a credit history is to get a high school checking account linked to your parents account. Parents will be able to add money anytime that it's needed. Another simple step is using a site such as credit Karma to check your credit score. This will get teenagers in the habit of checking their score. Lastly, if one has the financial means to do so, get a credit with a small credit limit. This will help adolescents establish a credit history/score.