What is Credit and Why is It Important? Everything you need to know!

One aspect of financial power is one's capacity to borrow money from other individuals. You are aided in acquiring the products you desire now, such as a vehicle loan or a credit card, in return for your promise to pay later. Now is the time to improve your credit score in order to boost your chances of being approved for loans in the future.

What is Credit?

There are several different types of credit available to you. Installment loans and revolving credit are two of the most common types of credit accessible to consumers today.

An Installment Loan is a lump sum amount of money that is supplied to you for a specified purpose and that is paid back over a period of time.

Common Examples of Installment Loans

• Student loans
• Auto loans

Revolving credit lines are credit lines that can be used again and again even after they have been paid off. You can use your credit card to make purchases as long as the amount on your account does not exceed your credit limit, which may change over time depending on your credit score. Among the several types of revolving credit accessible to customers today, credit cards are the most common.

Credit Cards

It is not all credit cards that function in the same way. When deciding on the finest credit card for you, make sure to consider all of the benefits and drawbacks of each card before making your decision.

Interest Rates

Interest is the cost of borrowing money, and it represents the expense of borrowing money. In most cases, lenders charge a percentage of your account's average daily balance as interest on the money you borrow. This proportion is referred to as an interest rate. It is determined as follows: This interest rate is applied to your outstanding debt on a monthly basis. Pay close attention to the tiny print on your credit card since different types of transactions, such as purchases and cash advances, may have variable interest rates on them.

Fees

There are costs associated with many credit cards, albeit not all credit cards charge the same fees. Make ensuring that you are aware of and understand all of the fees for which you will be responsible.

Credit Limit

It is the utmost amount of money you are permitted to borrow on your credit card that is referred to as your credit limit. You will be charged a fee, which is determined by the lending institution based on your credit history and income.

Credit Reports and FICO Scores are examples of credit origins.

When you ask for a loan, lenders will check your credit report to determine whether or not you are creditworthy of borrowing money. Consumer reporting companies around the country use your credit record to determine your credit score. Consumer reporting agencies in the United States are divided into three key categories: Equifax, TransUnion, and Experian.

What is a FICO Score?

It is necessary to consult credit records in order to compute a credit score. This credit scoring system developed by the Fair Isaac Company ranges from 300 (bad) to 850 (outstanding), with 300 being the worst possible score and 850 being the best possible score (high). You will be more likely to get approved for new credit or to receive a lower interest rate if your credit score is higher. 

When determining your FICO score, a range of factors from your credit history are taken into account. The fact that the major consumer credit reporting companies do not publish the methodology by which credit scores are computed means that no one is aware of the exact technique by which credit scores are calculated. 

You may see a difference in your credit score from one reporting agency to the next because the credit reporting agencies may have different information about your credit history.

Hard Inquiries vs. Soft Inquiries

The act of a potential creditor requesting information about your credit report and score is referred to as a hard inquiry, and it is recorded on your credit report. It is possible that an excessive number of them will give the impression to potential creditors that you are attempting to open more than one line of credit, causing them to reject your request for a loan altogether.

It's probable that you'll hear of "soft inquiries" throughout your investigation. They occur when your credit history is assessed when you are not seeking to open new credit lines, which is the situation for the vast majority of people. If you have made soft inquiries as opposed to hard inquiries, lenders will not take this into consideration when deciding whether or not to lend you money.

Examples of Soft Inquiries

• When you apply for a rental property, the landlord will do a credit check on you.
• Your personal credit report is being supplied to you in order to allow you to keep track of it.
• Your Superpower: Good Credit
• Credit scores have an impact on a wide range of facets of life.
• Determine whether a fresh loan application has been authorized or denied by a lender.
• You have the ability to influence the interest rates and fees associated with your loan.
• Companies will assess your qualifications before extending you an offer for new employment.
• Leasing agents will take your application into consideration when deciding whether or not to rent to you.
• Find out if you are eligible for student loans, which may include the majority of private loans.
• The insurance companies will conduct an inquiry into your background when you apply for many types of insurance, such as automobile or homeowners insurance.

Good Credit vs. Bad Credit

Maintaining a regular payment schedule and making on-time payments on all of your accounts until your debt is entirely paid off can help you to build and maintain good credit over the years. If you have a poor credit score, it means you have had problems fulfilling your financial responsibilities; you may not have paid the required minimum payments or you may have failed to make payments on time in the past.

Student Loans and Credit

Whether your student loan payments are paid on time or late, a copy of your student loan payments is sent to each of the three major national consumer reporting companies. Your loan servicer will begin reporting on your account as soon as the funds are disbursed.

In the meanwhile, as long as you are enrolled in school, your payment amount will be listed as zero dollars, and your account status will be either pays as agreed or current, indicating that your account is in satisfactory condition.

Your account status remains either paid as agreed or current throughout the time you are in your grace period, depending on your circumstances.

Making Payments

After you begin repaying your student loans, the number of your regular installments, which will be determined by your repayment plan, will remain on your credit report for seven years. If you pay your student loan payments on time each month, your student loan account will continue to display as pays as agreed or current as long as you continue to make regular payments on your student loan account.

Missed Payments

The amount of your student loan payments are recorded once every 30 days, regardless of whether they were made on time or late. Great Lakes cannot remove a late or missed payment from your credit history unless there are exceptional circumstances or it can be demonstrated that you were in school, on deferment, or in your grace period.

Default

It is possible that your loan could go overdue if you do not make sufficient payments on time. When this occurs, the account status changes to claim has been filed with the government, indicating that the account has been paid by a government claim and that the account now has a balance of 0 dollars in it. Failure to pay a loan on time lowers your FICO score and makes getting additional lines of credit in the future more difficult. 

As soon as this occurs, contact your loan servicer to learn about available alternatives for rehabilitating your loan and returning your account to good standing, which will put you back on track to improving your credit score.