Credit 101

Photo by Anna Shvets

Credit is the ability to use money you don’t have to make a purchase, based on the trust that you will pay the money back.  It can help you buy a car or house, or other large purchases.  Paying your credit card bill on time will build your credit history and you will be more likely to be able to borrow larger amounts of money in the future.  If you don’t pay credit cards or loans back on time, then your credit score will lower and you will be less likely to qualify for a loan or make a large purchase like a car or house.

A credit score is a number based on your financial history, that determines your credit-worthiness.  Credit scores range from 300 to 830 and use a number of different factors to determine your overall score.

Factors that determine a credit score:

  • Payment history
  • Total debts owed
  • Length of credit history
  • New credit
  • Types of credit used

Track your credit score!  There are many sites online you can visit to check your credit score, but some may charge a fee.  Sites like Credit Karma offer free credit reports and breakdowns explaining what specifically determines your score.

Lenders will look at your credit score to determine if they will lend you money, and if so, what the interest rate will be.  Whenever you borrow money, you will have to pay it back with interest so you actually pay back more money than you borrowed.  The higher your credit score, the lower the interest rate will be.  Having a low credit score makes it more difficult to borrow money and results in more interest.    

Tips to establish credit:

  • Open a credit card to pay your bills and then pay it off monthly
  • Do not max out your credit card!
  • If you cannot make a payment on time, call the agency to schedule a payment plan
  • Don’t open multiple credit cards at once

See our tips on budgeting realistically, filing taxes, and banking, with steps to opening a bank account.