Get Credit Smart
Smarter About Credit Day
October 17, 2016 by Mark Dye
Today is officially “Smarter About Credit Day,” but let’s be honest: every day should be Smarter About Credit Day. After all, your credit history is used for everything from loans to how much you pay for car insurance to employment decisions, meaning it has become (for better or worse) the most important part of your financial life.
In order to make it a good life, you’ll need to be smart about credit.
Learn the lingo
Knowing the terms used in credit will go a long way in better understanding it. We have a guide with many terms, but a few basic ones you’ll need to know:
- Annual Percentage Rate (APR): A calculation that defines the total cost of a loan or line of credit, including all interest and fees. This will often be higher than the interest rate because it includes the fees.
- Interest rate: The fee charged by a lender for the use of the borrowed money and that is expressed as a percentage of the total amount borrowed. The interest rate is dependent upon many factors, including rates charged by the Federal Reserve Board and the past credit history of the borrower.
- Credit bureau: A credit-reporting agency that is a clearinghouse for information on the credit rating of individuals or companies. The three largest are Equifax, Experian and TransUnion.
- FICO score: The most commonly used credit score. The name comes from the Fair Isaac Corporation, which developed the scoring model.
Know the true costs
The two most commons types of credit are loans and credit cards, but judging which one is the “better deal” isn’t always cut and dry. This is because it depends on your goals: do you want a lower monthly payment, or do you want to pay it off earlier with less interest? For example:
- $5,000 in credit card debt at the national average interest rate of 15.5%:
- Monthly (minimum) payment: 4% of balance (starts at $200/month to start, decreasing with each payment)
- Time to pay in full with just minimum payments: 124 months (10 years, 4 months)
- Total Interest = $2,286
- A $5,000 installment loan at the same 15.5% rate:
- Monthly payment: $174.55 (flat)
- Time to pay in full: 36 months (3 years)
- Total interest = $1,283.92
So if you want to pay less per month, you could go with the card. (Note that this assumes you don’t charge more on it in the meantime). If you were okay with paying more each month, but wanted the debt paid off sooner, then you could go with the installment loan.
Settle your score
Know your credit score by going to www.AnnualCreditReport.com. This is the only site legally able to give you at least one free copy of your credit report from each bureau each year.
Also, many banks and credit card companies now give you your credit score for free with your bill each month. This can help you keep track of your score much more easily and without needing to do anything extra, so take a good look at your recent statements to see if your bank or card issuer does the same.
What affects your score?
Credit scores are often called “FICO Scores” due to the scoring model used by most lenders and the three major bureaus that were created by Fair Issac and Company (thus, "FICO"). While each bureau (and even each lender) might have tweaks here and there, the basics are the same for the FICO Score 08 model:
What does not affect your score?
There is often confusion about what won't affect your score, but per myFICO.com, some of the things that will not affect your score:
- Race, gender, nationality, gender, or marital status
- Where you live
- Child/family support obligations
- Participation in credit counseling
- Employment history or current job title
It is important to note that lenders might look at some of these, but they are not factored into your credit score by FICO.
This is, of course, a very high-level view of your credit and what goes into it. We have a wealth of other resources that can help you get smarter about credit: