If you’re like most people, credit plays a role in your life. But do you really understand how credit lines, credit cards and credit scores actually work?
Here’s a crash course on everything related to credit, including information on the different types of credit and where credit scores come from. We’ll also give you a few tips on how you can improve your score and enjoy more access to credit over time.
Overview: Credit Defined
Credit is money that you borrow to pay for a good or service. There are a few different types of credit and you can use credit to buy almost anything. Some merchants have even switched to all-credit payment systems to prevent fraud and robbery that can occur when you pay cash.
You can get credit from a credit grantor — a bank, online lender or other institution that gives you money that you agree to pay back over time. In exchange for issuing you credit, most credit grantors charge some form of interest on what you borrow.
It’s important to have good credit because it gives you access to more opportunities. Your borrowing history helps to shape your credit score, a three-digit number that represents how reliable you are as a borrower.
A solid borrowing and repayment history can help get you access to lower interest rates and more housing choices. Some employers even look at credit scores. It’s worth taking some time to understand how credit affects you and to know your credit score if you plan to make any major financial decisions in the next few years.
What are the 4 Types of Credit?
Did you know that not all credit is the same? It’s true! There are four major credit types.
Revolving credit is a type of credit that you can use over and over again as long as you repay what you borrow. When you take out a revolving line of credit, your lender issues you a maximum line of credit. You can use your line of credit up to the limit. If you reach your limit, you can’t spend more on your line of credit until you pay off some of your balance.
For example, let’s say that you have a credit card with a $10,000 limit and you spend $5,000. You’d then be able to spend another $5,000 on this credit line before you “maxed out” your credit and couldn’t spend any more. When you pay off your $5,000, you’ll have your full $10,000 available again. Credit cards are some of the most popular types of revolving credit.
Charge cards are kind of like credit cards because they have a revolving balance. However, charge cards require you to pay off your balance in full every month. A standard credit card requires you to pay a small monthly minimum payment.
Beyond that minimum payment, you can roll your balance over to the next month with an interest charge. Charge cards, on the other hand, require you to pay off everything you charge before the due date or pay a penalty.
Agreements with service providers are a type of credit. When you receive a service credit, you get the service first and then promise to pay for the service at the end of the month. Gym memberships, utilities and cell phone bills are all types of service credit agreements.
Not every service creditor reports to the three major credit reporting bureaus. This means that even if you pay your internet bill on time every month, you might not see a change in your credit score.
Installment credit means you borrow a certain amount of money and then agree to pay it back over time with interest. Installment lines of credit are often called installment loans and examples include mortgages, auto loans and student loans.
Installment loans name a set period of time you can use to repay your loan in equal payments. The interest rate you’ll pay on your installment loan varies depending on a number of factors, from credit score to loan type.
Your installment credit line may also include a lien if you’re using it to buy a home, car or another asset. A lien means that your lender technically owns your asset as collateral until you fully pay back your loan. If you miss too many payments on your installment loan, a lien allows your lender to seize your asset.
What is a Credit Score?
Your credit score is a three-digit number that tells banks, credit card companies and other lenders a little bit about how you borrow and repay money.
When you use credit, your creditors submit information to one or more of the three major credit reporting bureaus: Experian, Equifax and TransUnion.
These credit reporting bureaus collect information on almost everyone in the United States. Each bureau then uses your information and assigns you a credit score ranging from 300 to 850.
Higher scores give you access to better interest rates and more opportunities. Lower credit scores can make it difficult for you to get a loan. The score ranges are as follows:
- Very poor: 300-579
- Fair: 580-669
- Good: 670-739
- Very good: 740-799
- Exceptional: 800-850
Each of these bureaus also issues you a credit report. Your credit report contains information on your credit score and how you’ve used credit in the past. When a credit card company, lender or bank requires a credit check, it means they’re asking for permission to view your credit report.
As credit reporting bureaus receive more information over time and some items expire, your credit score may change. For example, you may open a new personal loan and make your payments on time every month and your credit score will rise over time.
On the other hand, if you file for bankruptcy or you miss a student loan payment, your score will go down. It’s important to consistently monitor your credit score to make sure that you’re on the right path to financial health.
MoneyLion provides credit monitoring services with real-time alerts through the MoneyLion app.
What is Considered a Good Credit Score?
Good credit scores mean that you pose less of a risk to lenders and you can get approved for most loans.
You’ll need good credit if you want the best access to loans and opportunities. If you have a credit score that’s at 800 or above, you’re officially in the exceptional credit club. Banks, credit card companies and other lenders prefer to work with borrowers who have exceptional credit. Lenders extend better interest rates, higher loan amounts and more rewards to applicants who have exceptional credit.
However, even if your credit isn’t in tip-top shape, MoneyLion can still help you out.
You can apply for a MoneyLion Credit Builder Plus membership and become eligible for a $500 personal loan at just 5.99% APR, even with a lower credit score.
Also, not every creditor you work with reports to every credit bureau, but MoneyLion’s 5.99% APR credit builder loan reports to all three bureaus and updates your score weekly so you can track your progress.
How Do I Get My Credit Score?
There are a few different ways you can get your credit score. First, you can check out your credit reports. Under the Fair Credit Reporting Act, you’re entitled to one free pull of each of your credit reports every 12 months. You can visit annualcreditreport.com to get your free credit reports. Remember that your score might vary slightly, depending on each report.
Beyond that, there are a few companies, banks and credit card providers that allow you to view your credit score for free. However, some of these free sources aren’t actually free.
They may require you to sign up for an expensive credit monitoring system, or they might only offer you free scores for a limited time. Remember to read the complete terms and conditions of any free credit score provider.
Monitor Your Credit with MoneyLion
Do you want to view your score for free or learn more about improving your score? MoneyLion’s credit monitoring system gives you 24/7 access to your credit score, history, credit utilization, tips and more. This can help you create a solid plan to improve your score.
Credit monitoring comes with a MoneyLion membership. If you aren’t sure where to start when improving your score, MoneyLion can be a huge asset.
3 Tips to Increase Your Credit Score
Need some more help increasing your score? Start with these simple tips.
1. Look For Mistakes
Credit report mistakes are more common than you might think. According to the FTC, about one in every five Americans has a mistake on his or her credit report.
Mistakes can lower your credit score, so you’ll want to dispute them as soon as possible. Pull each of your credit reports once every 12 months and make sure you have no errors. If you do find an error, dispute the item directly through the credit bureau.
2. Pay Your Bills on Time
About 35% of your FICO credit score comes from your payment history. This means that the most effective way to raise your score is by paying all of your bills on time every month.
Write down what you owe on your cards and loans and their corresponding due dates. If your bank permits it, you may also want to sign up for automatic bill pay. This will prevent you from accidentally missing a payment.
3. Apply For New Accounts Sparingly
When you apply for a loan or credit check, banks and lenders do a hard inquiry on your credit report. Hard inquiries lower your score, so it’s best to avoid applying for too many accounts at once.
If you have a big application coming up (for something like a mortgage or student loan), put off opening any new accounts until you’ve received a decision.
Staying On Top of Your Credit
Though credit may seem hard to master at first, it only takes a little reading to understand your score. Like any other tool, credit can help you — or hurt you. It all depends on how you use it. By using credit sparingly, paying your bills on time and working to pay down debt over time, you’ll be well on your way to an exceptional credit score.
Do you need more help raising your credit score? MoneyLion can help. From low-interest personal loans that can help raise your credit score to credit monitoring, MoneyLion is your one-stop-shop for credit improvement.
Download the MoneyLion app from the Google Play or Apple App store to get started.