Understanding Credit 101

Understanding Credit 101

Get your questions answered about credit:

Definition of Credit

  • A legal agreement to receive cash, goods, or services now and pay for them in the future

Examples of Credit

  • Credit cards, auto loans, student loans, and mortgages

Advantages of Credit

  • Convenient
  • Useful for emergencies
  • Often required to hold a reservation
  • Ability to purchase expensive items sooner
  • Eliminates the need to carry large amounts of cash

Disadvantages of Credit

  • Paying interest
  • Additional fees are common
  • Temptation to overspend
  • Can cause large amounts of debt
  • Identity theft

Credit Reports

  • A credit report is a detailed report of an individual’s credit Credit bureaus collect information and create credit reports based on that information, and lenders use the reports along with other details to determine loan applicants’ creditworthiness

What is a Credit Score or FICO® Score?

  • A prediction of how likely you are to pay your bills
  • A number between 300 and 850 derived from many different factors
  • A number that drives the approval of credit extensions and the interest rate you pay on those extensions

Range of Credit Scores

The following are some basic guidelines for interpreting a credit score:

  • 620 and below – Poor credit
  • 621-690 – Fair credit
  • 691-720 – Good credit
  • 721-750 – Good to excellent credit
  • 751-800 – Excellent credit
  • 801 and above – Nearly perfect credit