What is Credit?

This article was recently published in CommunityAmerica's "Let's Talk Money" section of the Kansas City Star.

According to Experian, credit is the ability to borrow money or access goods and services with the understanding that you'll pay later. Lenders, merchants, and service providers – otherwise known as creditors – grant credit based on their confidence that you will be able to pay back what is borrowed, which is where your credit score and history come into play.

Before focusing on building your credit, let’s start with a basic understanding of what credit is and how your actions may impact your credit score and history. With that…

Let’s Dive into Credit Basics

Your credit score is a numeric grade of your "creditworthiness," or in other words, how likely you are to be able to pay your bills or loans on time. This three-digit number is based on how well you've managed your money and debt over time, also known as your credit history, which is displayed on your credit report. The higher your credit score, the more likely you will be viewed by lenders as someone who can reliably manage and repay debts on time.

Your credit score is determined by a variety of factors including payment history, balances/amounts owed, length of credit history, types of credit, and new credit. We break it down here.

Why Credit is Important

Practicing good money habits and focusing on building good credit is important because your score and credit history can have an effect on a variety of outcomes in your life, such as:

• Getting a Loan or Credit Card – Good credit shows you're more likely to make payments on time, which can help you qualify for other loans or more credit in the future.
• Saving on Interest – A higher credit score may give you access to lower interest rates on loans and mortgages, saving you money on interest over the life of the loan.
• Landing a Job – Many employers will check your credit history to get an idea of how responsible you are.
• Renting an Apartment – Potential landlords can also take a look at your credit to find out how much of a risk you might be as a tenant.
• Adding Phone or Utility Services – A good credit history could mean reduced security deposits and faster access to service.
• Reducing Car Insurance Costs – It’s common for car insurance companies to use your credit history as a factor for determining the premium you’ll pay.

How to Check Your Credit

Knowing that credit impacts so much of your overall financial picture, it’s a good practice to get in the habit of checking your credit on a regular basis. There are several fast and free ways to do this.

You may have heard the term “credit bureau” in discussions related to credit. These are companies that keep tabs on all your credit accounts such as credit cards, mortgages, auto loans, and lines of credit. They evaluate how you’re managing each account and then compile all this information into a single document called a credit report, which is then used to generate your credit score. The three credit bureaus are TransUnion®, Experian®, and Equifax® and you can get a free copy of your credit report once a year from each bureau.

Another way to get your credit report is through credit monitoring services such as AnnualCreditReport.com. These mobile apps and websites provide you with an estimated credit score, along with the details about how that score was generated. Your credit score on these services may be slightly different from what’s reported by the credit bureaus because they are not coming from the direct source, but they can still be a helpful way to gauge where you stand.

Some financial institutions like credit unions and banks may also provide you with a free credit score through their online banking.

More than a Score

There’s no denying the significance of credit, but it’s also important to remember that your score is not the end all be all for your financial health. Other important areas like budgeting, saving, and investing all contribute to your financial outlook. Always keep the big picture in mind and know that your credit is only one indicator of your overall financial well-being!

If you have questions about your credit history, building credit, or would like to meet with a CommunityAmerica representative to discuss your financial picture in general, contact a certified Well-Being Coach today, or visit your nearest branch.