Understanding Credit

 

Why is My Credit Important?

Your credit history says a lot about you. It demonstrates whether you have paid your bills as agreed or whether you have a history of defaulting on debts.

When you purchase goods or services without immediate payment, you have created a debt. To assess the risk of you not repaying the debt, lenders frequently examine your credit history, which contains information on whether or not you've repaid your debts in the past. If you have reliably repaid your debts in the past, you'll find that lenders are more willing to offer you credit at favorable rates.

How do I Establish and Maintain Good Credit?

Sometimes people think that no credit is the same as good credit… not always. Establishing a positive credit report can help you qualify for lower interest rates, get approved for an apartment, and even acquire a higher-paying job.

As you prepare to head off to college or your first job, it is important to begin establishing a good credit record:

  • Develop a budget and pay all your bills on time – never ignore overdue bills
  • Don't apply for credit needlessly – a longer history of good credit is better than a short history of excessive credit
  • Keep your outstanding debt as low as you can by only borrowing what you need
  • Monitor your credit rating and be aware of any red flags or inaccurate data

How are Credit Scores and Reports Calculated?

Potential creditors use the information on your credit report to calculate your credit score. Your report includes:

  • Personal information including reported employment
  • Account information or trade lines
  • Inquiries
  • Public records information

Generally, lenders review your credit report provided by one of the three major credit reporting agencies - Equifax, Transunion, and Experian. The federal Fair Credit Reporting Act requires each of the nationwide credit reporting agencies to provide you with a free copy of your credit report, at your request, once every 12 months.

Important! There's only one online authorized source for obtaining your free credit reports www.annualcreditreport.com beware of other sites that may look and sound similar but may require you to purchase other services to receive a "free" report.

What is a FICO Score?

A FICO score is one of the most widely used credit report tools lenders use to determine credit rating. Your FICO score is based on your payment history, current level of indebtedness, types of credit used and length of credit history, and new credit. FICO credit scores range from 300 to 850. Generally, a FICO score above 650 indicates that a person has a very good credit history. People with scores below 620 may find it difficult to obtain financing at lower rates. A borrower must have a score of 680 or higher to qualify for an Alaska Supplemental Education loan; if the borrower does not meet the credit requirement, a cosigner with a qualifying FICO score may be added to the loan.

As a consumer, you will find that your credit history can dramatically impact the amount you pay for goods and services. As an example, the table below shows the average interest rate for vehicle loan by FICO score:

Credit Score Interest Rate Monthly Payment Total Interest Paid
720-850 4.072% $565.28 $2133.55
670-719 5.842% $585.32 $3095.19
660-689 7.525% $604.76 $4028.68
620-559 11.162% $648.11 $6109.12
590-619 16.198% $711.04 $9130.15
500-589 17.487% $727.69 $9929.14
Note: Dollar impact calculated for a 48 month loan on a $25,000 car.

For more in-depth information on credit, finances, and consumer information, visit the Federal Trade Commission (FTC) website at www.consumer.ftc.gov.

If you have experienced credit trouble, check out Credit Repair: How to Help Yourself available on the FTC website, or visit the National Foundation for Credit Counseling website at www.nfcc.org for information on financial counseling.