You’ll often hear of people “having good credit” or “managing their credit.” But what does that mean?
Credit is basically your ability to borrow money and pay it back within the set conditions of time and/or interest. Credit comes in many forms but the most common forms are credit cards and loans. Both of these structures loan you money with the expectation that you will repay that money, usually with interest, by a certain time.
“Good” vs “Bad” Credit
Demonstrating that you reliably pay back these loans over time builds your credit and makes you an appealing candidate for future loans; this means you have “good” credit. The next time you want to rent an apartment, buy a house, lease a car, etc., your credit history will provide some confidence to the lender that you are a safe bet. Additionally, good credit can save you money from interest rates, waived fees, or down payments when setting up accounts with utilities.
When you miss payments on loans, don’t pay bills, or borrow more debt that is considered reasonable, your credit suffers. “Bad” credit is a history of poor financial behaviors that makes you a risk to lenders. You may find that you’re denied a rental application to an apartment or unable to borrow enough to buy a car.
Credit Report
Your credit history is recorded with three major credit bureaus: Equifax, TransUnion, and Experian. These companies track the number of factors that comprise your financial history and share them with lenders when you ask for a loan. Things they track include:
- Number of open accounts and their balance
- Payment history, including whether payments were late or on-time or missed
- Outstanding loans and their balances
- Bankruptcy or foreclosure
You are able to receive a copy of your credit report each year from credit bureaus by law. It is a good practice to check your credit report regularly for any errors that may be impacting your financial health. To get your free report, visit AnnualCreditReport.com and provide your Social Security Number (SSN), address, birthdate. You’ll need to answer some security questions about your financial past to authenticate your access such as past addresses you’ve lived at, loans you’ve had, schools you’ve attended, etc.
Credit Score
You’ll often hear these companies in association with “credit scores.” A credit score is three-digit number typically ranging from 300 to 850. It is intended to quickly communicate your credit history and other components of your credit report into a shorthand used by financial institutions to determine your creditworthiness. Each credit bureau has a varying definition of what “good” scores are.
| Credit Score Ranges | Rating | Description |
|---|---|---|
| < 580 | Poor | This credit score is well below the average score of US consumers and demonstrates to lenders that the borrower may be a risk. |
| 580-669 | Fair | This credit score is below the average score of US consumers, though many lenders will approve loans with this score. |
| 670-739 | Good | This credit score is near or slightly above the average of US consumers, and most lenders consider this a good score. |
| 740-799 | Very Good | This credit score is above the average of US consumers and demonstrates to lenders that the borrower is very dependable. |
| 800+ | Exceptional | This credit score is well above the average score of US consumers and clearly demonstrates to lenders that the borrower is an exceptionally low risk. |