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Nick Messier '13
Biopharmaceutical Technologist, Charles River Laboratories
Major: Biology, Criminal Justice
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- Understanding My Credit
Understanding My Credit
What is a Credit Score?
Your credit score is drawn from your credit report and is determined by the credit bureau pulling your report. This report outlines your borrowing, charging, and repayment activities. A good score helps you reach financial goals; a poor score limits your financial opportunities.
Since your credit report influences whether you are able to buy a home and get a job, it is extremely important to protect your credit rating by making loan and bill payments on time and by not taking on more debt than you can handle.
What is a Credit Report?
A credit report is a record of your credit activities. The report lists some basic demographic information about you and it provides a history of your use of credit such as any credit card accounts or loans you may have, the current balance due if any, and how regularly you make your payments.
What Type of Information Is on Your Credit Report?
There are usually four types of information:
- Identifying information: Your name, current and previous addresses, social security number, year of birth, and current and past employers.
- Credit Information: Any accounts you have with banks, credit-card issuers, utility companies, and other lenders (the date you opened the account, your credit limit or the loan amount, any co-signers of the loan, and your payment history over the past two years.)
- Public Record Information: State and county court records on bankruptcy, tax liens, or judgments.
- Recent Inquiries: The names of those who have obtained copies of your credit report within the past year (two years for employment purposes.)
How Do You Get a Copy of Your Credit Report?
You are entitled to receive one free credit report every 12 months from each of the nationwide consumer credit reporting companies:
In addition a free credit report can be requested through www.annualcreditreport.com.
Also, if you are denied credit you are entitled to a free copy of the credit report even if you have already obtained a free copy within the year.
Why Should I Request a Free Copy of My Credit Report?
Reviewing your credit report on an annual basis is an excellent way of assuring that there are no discrepancies within your report. It lets you see how each of your creditor's are reporting your payment behavior to the major credit bureaus. Reviewing your credit report also allows you to see if you are a victim of identity theft where someone assumes your identity to obtain credit fraudulently. Annual reviews also allow you to correct any information that is incorrect.
Knowing your credit information is accurate avoids delays when you are applying for a mortgage, credit card and/or car loans.
How Do I Maintain a Good Credit Score?
There are a number of ways to create and maintain solid credit. For starters, set a budget. Understanding how much money is coming into your household each month and the amount of your monthly expenses (i.e. rent/mortgages car payment, student loan payment, etc.). This will allow you to live within your means and not be over extended.
Spend wisely. Once your budget is in place, make sure that you are only making purchases that are necessary. Try and keep credit card and loan expenditures to a minimum.
Pay you bill on time. Making timely monthly payments establish a payment pattern and shows creditors how likely you are to pay future debts. Timely payments help build and maintain your credit. If you are unable to make the minimum monthly payment on your debt, it is important that you contact your creditor to work out an acceptable payment arrangement. It is never okay to skip or not make a scheduled payment on any of your debt obligations.
Installment credit is a type of credit that has a fixed number of payments. You use installment loans for specified amounts and you know prior to accepting the funds how long you have to pay off the debt and the amount you will be repaying each month. As a result, installment loans can easily be factored into your budget.
When you first being repaying your installment loan, most of what you are paying off is interest. Over time, you begin paying an increasing portion of the loan principal (the original amount you borrowed), too. This increasing reduction in the principal amount is called amortization.
There are two types of installment loans: secured and unsecured. Secured loans are linked to some sort of collateral, such as a car or home. Secured loans usually carry lower interest rates than unsecured loans. However, if you default on your payments, the collateral you used to secure the loan may be in jeopardy of being confiscated by the holder of your loan's promissory note.
Unsecured loan, like your student loan are not tied to any material but the lender can attach your future earnings for repayment. Unsecured loans are riskier to a lender than a secured loan and therefore generally carry a higher interest rate.
The following kinds of debt are known as installment credit:
- Student loans
- Land loans
- Home construction loans
- Some equity loans
- Home improvement loans
- Automobile loans
- Boat or RV loans
- Personal loans
- Vacation loans
Revolving credit is a type of credit that does not have a fixed number of payments, in contrast to installment credit. An example of common revolving credit used by consumers includes credit cards.
Revolving forms of credit are more open-ended than installment loans. Revolving credit means you are given a set dollar amount you may borrow or use "up to" (your credit limit).
For example you obtain a credit card with a $2,000 credit limit. This means you can charge purchased up to a maximum cost of $2,000. Let's say you charge $1,000 of home appliances. This results in a remaining open credit amount of $1,000 ($2,000 credit limit minus what you have purchased and now owe back to the holder of your credit card.). As you make payments on the account, a portion of your payment (if you don't repay the total debt in full each month) goes toward principal and a portion goes toward the interest (the cost to you for "borrowing" the money).
As you repay principal, the "pool" of your available credit limit "revolves" back toward the original ceiling (maximum allotted to your as your line of credit). Continuing with our example, let's say you've paid back in principal $250. This means you would be eligible to charge again up to $1,250 before you complete repayment of the rest of the original principal used. You can make use of funds up to your credit limit as many times and for many purchases, as long as you continue to make regular on-time monthly payment on your outstanding debt.
Revolving credit rates vary widely depending on your credit and payment history. In addition, credit card issuers reserve the right to increase your interest rate, charge penalties or cancel your credit card for use at any time if you don't make timely payments.
How Can I Find Additional Information About Credit Reports and Credit Scores?
Additional information is available at: