Credit - Part 2

If you don’t know what credit is yet, make sure to read this article before proceeding.

Series on Banking

Here at Finance OneforOne, we think that understanding banking is an essential component of financial literacy. Banking is a general term used to describe the variety of services offered by banks. Our article series will cover everything from checking accounts to loans.

How does one have ‘good’ credit?

When we say that someone has good credit, we mean that that person is doing the 3 things that make up the “recipe” for great credit: 1) pays bills on time; 2) doesn’t apply for credit too often; and 3) does not spend too much (even if their credit limit—the maximum amount that can be spent in a payment period—allows them to do so).

How do we measure good credit?

Your credit (FICO) score is made up of five categories. The percentages represent how much the categories contribute to the FICO score.

The three credit bureaus, Experian, TransUnion, Equifax, prepare your credit report and credit score to represent your credit history and determine if your credit is good. Your credit report is a detailed history of your credit; it includes dates your credit accounts were opened, your credit account limits and balances (debt), and your payment history (on-time or late). The information on your credit report makes up your credit score (again, prepared by the 3 bureaus). Your credit score is a numerical value that ranges from 300 to 850 and is a more common method of representing good credit. This is also called the FICO® Score score because FICO data software is what analyzes your credit report and determines your credit score.

Your credit score is classified as "Bad," "Fair," "Good," or "Excellent." Most places want to see an above-700 score.

Importance of Good Credit

The quality of your credit shows how you spend and manage money. Your credit history and score are checked and requested for when you are applying for a job, qualifying for loans (with low interest rates!), or financing your insurance (lower monthly payments). Having bad credit leads one to think that you overspend your money and are not a reliable person (which is why having good credit has so many perks). Having bad credit additionally hurts your chances of getting future credit loans.