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Understanding Credit and Your Credit Score

Credit can seem complicated, but it doesn't have to be! In this week's post, we'll break down the basics of credit, the different types of credit, how to choose a credit card, and what goes into your credit score.

What is Credit?

Credit is basically an agreement between a lender (creditor) and a borrower (debtor). The borrower gets access to money now and agrees to pay it back over time, usually with interest. Having good credit means you are seen as less risky for lenders. Bad credit means you seem riskier.

Why Credit Matters

Your credit score affects your ability to get loans, credit cards, mortgages, approval for rental applications, insurance rates, and even job opportunities. So building good credit should be a priority.

Types of Credit

There are three main types of credit:

  • Revolving credit - Like credit cards, where you can borrow up to a limit.

  • Installment loans - Fixed amounts and payments, like mortgages, student loans, or auto loans.

  • Open credit - Ongoing accounts like utility bills.

Choosing a Credit Card

When getting your first credit card, look for ones with no annual fee, low APR, and if possible - rewards! Good starter cards include the Chase Freedom Unlimited, Capital One Savor One, and Discover It Student Card.

What Impacts Your Credit Score?

The main factors of your credit score are:

  • Payment history

  • Credit utilization ratio

  • Length of credit history

  • Credit mix

  • New credit requests

Checking Your Credit Score

You can check your credit score for free through services like Credit Karma and Experian. Monitoring your score is important to maintain good credit!

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