Bad Credit Boot Camp

An OppLoans Guide to Understanding Your Credit, Credit Report, and Credit Score.

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What is credit and why does it matter?

Credit is a way to obtain money now and pay for it later. Generally speaking, there are a few different kinds of credit: Revolving credit, secured credit, unsecured credit, and installment credit.1

  • Revolving Credit. Most credit card accounts are considered revolving credit. The borrower is given a set amount of money they’re allowed to use (called a credit limit) and must make monthly payments to stay under that amount.
  • Secured Credit. Secured credit can be obtained by offering something you own as collateral. If you don’t pay back your loan on time, your lender is entitled to take that asset. Car title loans, mortgages, and home equity loans are all examples of secured credit.
  • Unsecured Credit. Unsecured credit is credit that you can obtain simply by telling your lender that you’ll pay. Utility and medical bills are two major examples of unsecured credit. You don’t need to prove you can pay for an expensive emergency surgery before you receive it.
  • Installment Credit. When you borrow money and agree to pay it back in a set amount of time, that’s called installment credit. Car loans and student loans are examples of this kind of credit. Paying off installment credit typically means making set payments every month for the same amount.

Most creditors charge an interest rate, which is essentially the cost of borrowing money. For example, if you borrow $100 from a lender who charges a 10 percent interest rate when the time comes to pay back that loan, you will owe your lender $110: $100 for the loan principal, or the original $100, and $10 in interest. On a loan or a credit card, interest is usually calculated and expressed in terms of an Annual Percentage Rate, or APR.1

Credit can be used for many things, from everyday purchases like clothes, food, and gas to larger investments like cars and houses. Having access to credit is important for everyone, but it’s especially important for those of us without thousands of dollars stored away in a trust fund. If you want to buy a house or a car, take out a loan for school, apply for an apartment or basically, do anything involving significant amounts of money, you need credit.

The problem is, not everyone uses credit responsibly. Borrow more than you can pay back or fail to understand the terms of the financial agreement you’re entering, and it’s very easy to fall into debt, and bring down your credit score in the process.

Your credit score can be found on your credit report, which is a detailed look at your borrowing history that contains information about who you’ve borrowed from, how much you borrowed, how much you owe currently and how often you made your payments on time.2  Because employers, mortgage lenders, landlords and credit card issuers all check your credit report, this information can affect your ability to get a job, a house, or borrow more money in the future.

“Put simply your credit score is calculated based on the information provided in your credit reports. You actually have three different credit scores. There are three different credit reporting agencies: Experian, Equifax, and Transunion. Well each of them will give you a different credit score based on the data contained in your credit report through their agency.
 
Information can vary wildly from each credit reporting agency. Because each agency has different information to go by, your credit score will be tallied differently which is why you can have three credit scores with a drastic range between them. Another frustrating thing is that different lenders use different scores for different types of loans.
 
Your credit rating is one of the most important three-digit numbers in your life as it will affect your entire financial life. It is not a number that reflects only present but is also a pathway to your future as well. It will affect your ability to secure a mortgage, rent a home and even find employment.”
-Steven Millstein, Certified Credit Counselor and creator of CreditZeal.