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Understanding Your Credit Report

Understanding Your Credit Report

What is credit? Credit is the use of someone else’s money in exchange for a promise to pay it back on a given date. There are two major types of credit: Revolving and Installment.

The best example of revolving credit is a credit card. If you are approved for a credit card your creditor makes a certain amount of money available to you when you want to use it. The maximum amount is called a limit. You are able to “borrow” from the credit card company up to that limit. If you have a balance with the credit company, each month you must make at least a minimum payment until what you borrowed is paid down. The more you pay down, the more you can borrow again.

Here is a specific example: From a $1500 limit, I borrow $500. This means I could still use my credit card up to $1000, but it also means that I will owe at least a minimum monthly payment each month until that $500 is paid down to $0. Once it is paid down to $0, I will have $1500 available to me again.

The best example of installment credit is a loan. If you are approved for a loan your creditor gives you a check for the amount of money for which you were approved. In return you will be required to make monthly payments of a set amount for a certain number of months or years, depending on what terms the creditor has specified as part of your loan package.

Here is a specific example: I obtain a personal loan from my bank for $1500. They give me a check for $1500. Now, I must pay them X amount each month until I have paid back the full $1500.

What is interest? In both of the above cases, the creditor will charge you interest. Interest is the cost to you of using someone else’s money. The amount of interest charged is set as a percentage of what you owe. It is usually expressed as an annual percentage rate. When you make your monthly payment to a creditor part of the payment is what you borrowed and part of the payment is the interest you owe.

In the case of revolving credit, you only pay interest when you have a balance. For example, if I used my credit card for $500 worth of purchases, I now have a balance, which means I will have to make payments. Part of my monthly payment (a percent of the balance) will go to the interest charge for the use of someone else’s money and part will go to paying down the principal, which is the amount that I owe.

In the case of installment credit, the situation is very similar. Part of my set monthly payment will
go to interest and part will go to principal. At the time that I am approved for the loan I will be told
what my annual interest rate will be. By the time I have finished paying my $1500 loan I will have
paid back more than $1500. I will have paid back the $1500 + the interest charged as a percent of
my balance each month.

How do you build credit? Many people are denied credit because they have little or no credit in their name. To build a credit file, you must borrow money and repay it according to the terms of the loan. You could obtain a credit card, then use it a little each month and pay it off regularly to generate a credit history. You do not build a credit history, however, if you apply for a credit card but never use it. You must use
the card and make payments for a credit record to accumulate. Paying down your student loans is another way to build credit.



Having a Good Credit Report

Having a Good Credit Report - By using or making payments on your credit card or making repayments on your loan you are building a record of on-time payments that will prove that you are “credit worthy.” Potential creditors will look at your credit history to determine if they believe that you will repay them.


What is a Credit Report

What is a Credit Report? Your credit report provides a summary of your credit history and allows creditors to analyze whether or not you would be a risky borrower. A credit report is much like a report card that you would get in school- It is a report card for you level of credit responsibility. Your credit report includes your name, address, birth date, social security number, and the name of your employer.