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The language around money, credit, and financial education are more complicated than they should be. Last week, we started our Credit Glossary by discussing interest rates, balances, APR, and more. Now, we’re picking up where we left off.
In the US, your credit score is the grade that assesses your ability to repay debt. When you apply for a loan, your score evaluates how likely you are to repay the loan. There are different credit score systems and credit bureaus that provide them, so it’s normal to have slightly different scores.
Your credit score can range from 300-850.
Credit History vs. Credit Report
Your credit history is a comprehensive round-up of all past loan applications, queries, balances, delinquencies, and payments, regardless of the lender and how long ago these transactions took place.
A credit report is shorter and includes only some portions of your credit history. A report excludes information that a credit bureau does not think is relevant to evaluate if you’d be a reliable borrower if you opened an account today. For example, closed loans and credit inquiries from more than ten years ago are part of your credit history, but they aren’t on your credit report. Why? Because those credit transactions are considered so old that they little impact on your current household finances.
Your credit mix is the summary of the different types of open credit that exist on your credit report. Your credit mix might include:
- Credit cards
- Personal loans
- Auto loans
- Student loans
Diversifying your credit mix is important, though opening too many at once can be seen as risky.
A credit limit refers to the maximum amount of credit a lender or financial institution could extend to you as a borrower.
Credit limits vary depending on the applicant’s credit history. If lenders see you as a high-risk borrower (someone with a low credit score), they may give you a low credit limit. If you can prove in your report that you are a low-risk borrower, you will get a higher credit limit.
A down payment is an initial and one-time cash payment made at the beginning of the loan process. By making a down payment on a loan, you are reducing the total balance of the loan from the start.
For example, imagine you’re buying a car for $25,000. You know you’ll need a loan, but you can put down $5,000 in advance (or 20%). Instead of taking out a loan and paying interest and fees on $25,000, you’ll only take one out for $20,000.
When checking your credit score and history, you may see the term “good standing” repeated in many places. According to Experian, “The definition of ‘good standing’ on a credit report is not necessarily the same as the lender’s definition. An account in ‘good standing’ is an account that has no negative payment history, past or present. If an account has had even one late payment, then it would be considered ‘potentially negative.’”
Lenders have their own criteria, which could be more nuanced. A lender or credit card company may not consider the account in good standing – even when the credit bureaus say it is. A few examples of this are:
- If you’ve paid late, but not so late to receive a fee
- If you’ve maxed out your card but still make the minimal payments
Lenders can close accounts or increase interest rates or lower credit limits if they become concerned that the borrower can’t reliably pay their debt.
You’ve likely heard the term “refinancing” when it comes to loans. Refinancing a loan is moving existing debt to a new loan or applying new terms to an existing loan. Say your credit score has increased significantly since you took out a loan. You may be able to negotiate a lower interest rate and refinance the remaining balance.
One factor that determines your credit score is your credit utilization. It is expressed as a percentage (or rate) and having a lower utilization rate is better.
Your utilization rate is impacted by the amount of “revolving credit” (from ongoing limits like credit cards) that you have available. Experts recommend you aim to keep your utilization rate under 30%.
How do you calculate your utilization rate? Imagine you have two credit cards with a combined limit of $8,500. On one card, you have a $500 balance and a $900 balance on the other. Your total balance is $1,400, and your utilization rate would be 16.47% ($1400/$8,500).
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