Managing Credit:
Why does credit matter?
Well,
Credit matters because it affects your ability to borrow money, rent a home, get a job, and qualify for lower interest rates.
Credit is the ability to borrow money and pay it back later, usually with interest. It helps build your credit history and credit score, which affect future borrowing.
What is credit?
pros
&
cons
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Build credit history and improve credit score
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Safer than carrying cash
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Useful in emergencies
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Earn rewards, points, or cash back
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Purchase protection and fraud protection
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Some offer travel perks or discounts
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High interest rates if you don’t pay the full balance
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Easy to overspend and fall into debt
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Late payments lower your credit score
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Fees (annual fees, late fees, foreign transaction fees)Interest adds up quickly if you only pay the minimum
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Can lead to long-term debt if mismanaged
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Affects ability to get loans if used poorly
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Temptation to buy things you can’t afford
A credit card allows you to build a credit history, here are some benefits and risks that are associated with credit cards.
What are Credit scores?
A credit score is a number that shows how trustworthy you are with borrowed money. It’s based on your credit history—like how much you owe, how often you pay on time, and how long you’ve used credit. Scores usually range from 300 to 850, and the higher your score, the better your chances of getting approved for loans, credit cards, or low interest rates.
The Three C's of Credit:
Capacity
Character
Capital/Collateral
Capacity is your ability to actually repay the loan. Lenders look at your income, job stability, and current debt to see if you can handle taking on more credit. If you’re already using most of your income to pay off other debts, they might be less willing to lend to you.
Character has to do with your reputation as a borrower. It’s all about your credit history—do you pay your bills on time? Have you ever missed payments or had any serious issues like defaults? Lenders use your credit score and payment history to figure out if you’re responsible and likely to pay them back.
Capital is what you already own, like savings, investments, or property. It shows that you have backup resources in case something unexpected happens. Having capital makes you look less risky to lenders because it means you’re not relying completely on future income to repay a loan.
So why are the three C's of Credit important? Well, the three C's help you understand how credit works and helps lenders make decisions if they can trust you with money.
FICO Scores:
it’s time to see how the three C's of credit turns into a number. That number is your FICO Score, one of the most commonly used credit scores in the U.S.
5 main factors that go in to your FICO score:
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Payment History (35%)
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Do you pay your bills on time? Late or missed payments hurt your score the most.
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Amount Owed (30%)
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How much debt you have compared to your credit limit. Using too much of your available credit can lower your score.
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Length of Credit History (15%)
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How long you’ve had credit accounts. Older accounts help your score.
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New Credit (10%)
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Have you applied for a lot of credit recently? Too many credit checks in a short time can hurt your score.
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Credit Mix (10%)
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Do you have different types of credit (credit cards, loans, etc.)?A mix shows you can handle different forms of debt responsibly.
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Common Credit Terms:
APR (Annual Percentage Rate) - The interest rate you pay each year for borrowing money with a credit card or loan.
Minimum Payment - The smallest amount you must pay on your credit card bill each month to avoid late fees.
Credit Limit - The maximum amount you can borrow on a credit card.
Interest - The extra money you pay when you borrow and don’t pay it back right away
Credit Report - A record of your credit activity, including how much you owe and whether you pay on time.
Secured Credit Card - A card that requires a cash deposit as backup—great for building credit.
Unsecured Credit Card - A regular credit card that doesn’t require a deposit.
Grace Period - The time between your billing date and due date when you can pay off your balance with no interest.
Delinquent - A missed payment that’s overdue.
Statement - A monthly summary of your credit card activity and amount due.
More Resources: