Credit 101
Credit 101 – What You Need to Know….
Okay, so here it is, consider this your introduction into the confusing and dangerous world of credit. The danger of credit has been hyped up for years. Since its conception, the credit card has trouble millions of young adults with thousands of dollars worth of credit card debt. Yet, the majority of men and women below the age of 21 remain financially ill-literate when it comes to credit cards. So here it is, boys and girls, a cheat sheet for those who have never had the priviledge of learning about the ever exciting land of credit. There are dangers to credit, but there are also a lot of benefits as well. The tricky part is keeping your credit card on a leash, because if you’re not careful, it could turn out the other way around. So here are a few commonly asked questions about that little piece of plastic burning a hole in your purse or wallet.
What is a Credit Score?
A credit report is your detailed financial history, however, your credit score is an objective summary of that information. It represents your “creditworthiness” as a number. Numerical weights are placed on different aspects of your credit report and a mathematical formula is used to arrive at a final score. There are literally thousands of score models used in the credit industry which consider different variables for different types of credit.
Credit bureaus offer several different types of scores in their product portfolio, appealing to the vast array of creditors and credit applications in the country.
How is a Credit Score Used?
A credit score is one of the primary tools a creditor uses when determining whether or not to grant you credit, along with how much credit and at what rate. The better your credit score the lower your interest rate will be. A decrease in interest rates can make a huge difference when it comes to paying off debt. Use the following case study as an example:
Sara, a college student with little credit history, wants to purchase a used car for $9,000. She visits her local bank to apply for a loan. Due to her lack of credit history, the bank offers her an interest rate of 14% on a 36 month used car loan. She will make a payment of $310 a month. By the time she is able to pay off the loan, she will have accrued $2053.33 in interest.
However, consider this:
Laura, a college student with fairly good credit, applies for the same loan and is offered an interest rate of 8%. After the 36 months, she will have accrued $1139.50, almost $1000 less than Sara.
Next, lets talk about choosing the right credit card for you…
