Credit University is a free, online educational program. It can help you understand the basics of credit, how to use credit responsibly and how to protect your identity. You’ll learn about topics like:
- How credit is used across the economy
- How to build a credit history
- Ways to improve your credit score
- How to make informed financial decisions
1. What is Credit?
When you use credit, you are borrowing money from the lender. A credit card is an example of debt. If you have a credit card with a $2,000 limit and you charge $300 worth of groceries to that card, then you have borrowed $300 from your bank or credit union.
The amount that people are willing to lend may depend on their willingness to trust that the borrower will pay back the loan. Credit reports provide lenders with information about borrowers’ history of repaying loans. Lenders consider your payment history when deciding whether or not to issue you new credit cards or give you other types of loans.
2. Why is Credit Important?
Credit is a critical aspect of your financial health and well-being. Not only does your credit determine whether you get approved for loans, but it also has an impact on the type of interest rates you will be offered. In other words, if you have a bad credit score, most lending institutions will charge you a higher interest rate than they would someone with good credit.
The other major reason why it’s important to improve your credit score is that companies use your credit report and score to make certain business decisions about you. This information is used as one factor that determines whether or not you get a job offer, rent an apartment, buy insurance and even which cell phone plan is right for you!
3. What is Credit Utilization?
Credit utilization is the ratio of credit used to credit available. For example, say you have 2 credit cards, one with a $1000 limit and the other with a $2000 limit. If you have charged $1000 to the first card and $1500 to the second card, your credit utilization is 50%.
4. How Do Lenders Use Your Scoring Model?
The second thing to know is that a scoring model is not used to determine whether or not you will be approved for a loan. When you apply for a credit card, mortgage, auto loan and other types of credit, the lender will check your credit report and score to see if you meet the minimum requirements for the loan. However, once you are approved for the loan, your score can be used to help lenders determine what kind of interest rate they should offer you on your loan. For example:
- A person with an Excellent (750+) FICO® Score might get offered an interest rate of 1%
- A person with a Fair/Good (680-749) FICO® Score might get offered an interest rate of 3%
- A person with a Poor/Fair (550-679) FICO® Score might get offered an interest rate of 15%
5. Should You Close Out Old Accounts to Improve your Score?
The answer to this is kind of complicated. Yes, closing accounts can make your credit age look better, but don’t just close a bunch of cards without thinking it through. It’s not so much the number of accounts you have that will affect your credit score as it is your credit utilization and your credit mix.
You’ll probably want those older accounts on your report to keep the average age of the accounts high. That said, having too many open lines of credit is rarely a good idea. You will want to make sure that you don’t have more cards than you can manage responsibly, because opening and closing accounts frequently has been shown to lower scores. If you are looking for advice about which cards are best for you, check out our expert reviews.
6. How Does Credit Help You Save Money?
You can always use your credit card to purchase items at the time you need them. This prevents you from waiting for a sale or missing out on buying a needed item in the event it is no longer available for sale. For example, if you are currently renting an apartment but would like to buy a house, don’t wait until you have saved up enough money to pay cash for the house. The cost of purchasing a house will probably increase over time and there is no guarantee that the home you want will still be available in the future when you have enough money saved up to pay cash for it.
7. When Is the Best Time to Check Your Score?
Now that you understand the difference between a credit score and credit report, you may be wondering when the best time is to check your credit score. The answer: anytime! Your credit score is free, as it should be. There are three major credit bureaus in the United States—Experian®, Equifax® and TransUnion®—and LendingTree provides a simple way to get your free credit score from all three of these bureaus using the tool at the top of this page.* Plus, checking your own score with a tool like ours won’t hurt your credit. You can check your free score as often as you’d like, but we recommend checking at least twice a year so you can spot any changes before they become problems that affect your ability to borrow money or qualify for rewards programs. It’s also a good idea to check your score before applying for new lines of credit so you know where you stand.
The more you understand about credit, the better equipped you are to make sound and informed financial choices.
Credit can help you save money, get a mortgage, and even qualify for a job. But there are many reasons why you may not want to use credit.
- Credit is high interest. Financial institutions will often impose higher interest rates for those who use credit than for those who don’t.
- You’ll have to pay more each month than if you paid cash. For example, if you have $40,000 in an account that earns 5 percent interest and has no fees or penalties and you lend it out at 9%, your total cost of borrowing will be $40,000 × .09 = $3,900 per year. If the same $40,000 were borrowed with a 13% APR and an annual fee of 2%, the total cost would only be $5,300 per year (still over 10% of your money), so the difference in this case is nearly 40%.
- It will reduce the value of your savings accounts by creating a negative balance that must be paid down to zero before additional funds can be deposited into them. This creates two problems: 1) you lose earning power while waiting on the balance to go back up; 2) decreased earning power makes it more likely that your nest egg will run out before you do