What is Credit?

Credit is defined as an individuals ability to obtain goods or services before payment, based on the trust that the payment will be made in the future. An individuals credit is way more than a three digit number, it can dramatically change their standard of living or the price they pay for many things.

Credit is hard to come by when you’ve never borrowed and even harder to obtain if you’ve over-borrowed. On the other hand, credit can seem almost limitless when you have established yourself as a trustworthy individual with a steady track record of on-time payments.

A credit score is calculated based on the following 5 factors:
1. Payment History (35%)
2. Credit Utilization (30%)
3. Length of Credit History (15%)
4. Credit Inquiries (10%)
5. Credit Mix (10%)

Each one of these factors can be considered:
1. Exceptional
2. Very Good
3. Good
4. Fair
5. Poor

The goal is to achieve an exceptional or very good rating in each of the 5 credit factors.

In most cases, a score of 750+ will be considered exceptional, while a score of 700-750 will be considered very good. Banks and lenders tend to favor individuals in these brackets because they are considered low risk and thus receive favorable interest rates and credit limits.

Scores of 640-699 are still considered good but may affect borrowers in negative ways by either being charged absorbant interest rates or by being denied credit altogether.

Credit scores not only affect what you can borrow, but it can also affect where you live or work. In most cases, landlords and apartment owners will not rent to individuals with scores below 700, in fear that rent will be late or unpaid. Also, most businesses run background and credit checks on individuals before they are hired which may have lasting effects on a hiring decision.

In summary, credit at some point will become a factor in your life. Whether that means when you are house hunting, car shopping or ready to make the move into corporate America. The best way to prepare your credit is by understanding where you stand. Applications like Credit Karma or Credit Journey are free tools that break down each one of the credit factors described above.
Take the first step today by checking your credit score and take charge of your financial future.