Credit is part of your financial power. It helps you to get the things you need now, like a loan for a car or a credit card, based on your promise to pay later. Working to improve your credit helps ensure you’ll qualify for loans when you need them.

What is Credit and Why is It Important
What is Credit and Why is It Important

Superhero with the title reading Good Credit
Keep reading to learn about credit reports and scores, how credit affects you, and how student loans factor into your credit report.

What is Credit? Types of loans

There are many types of loans. The two most common types are payday loans and revolving credit.

A payday loan is a set amount of your loan to be used for a specific purpose.

Common examples of payday loans

  • Student loans
    Car loans

Revolving credit is a line of credit that you can use after your payday. You can buy them as long as the balance remains below the credit limit, which can change over time. Credit cards are the most common type of revolving credit.

Credit Cards

Not all credit cards are created equal. Be sure to review all the pros and cons of credit cards when choosing the right one for you.

Interest rates

Interest is the cost of borrowing money. Lenders usually charge a percentage of your average daily account balance, called the interest rate. This interest rate is applied to your outstanding balance on a monthly basis. Credit cards may have different interest rates for different types of activities, like purchases or cash advances, so make sure you read the fine print.

Fees

Many credit cards charge fees, but not all cards charge the same fees. Take care to understand what fees you are responsible for fully.

MOST COMMON FEES

  • Annual Fees
  • Transaction Fees
  • Balance Transfer Fees
  • Late Payment Fees
  • Over-Credit-Limit Fees
  • Return Item Fees

Annual fees are similar to a membership fee—you are charged once per year just for having a card. Return to most common fees navigation

Credit Limit

Your credit limit is the maximum balance you can have on your credit card. This is determined by your lender based on your credit history and income.

Credit Basics: Reports and FICO Scores

Your credit report is what national consumer reporting agencies use to calculate your credit score, which lenders use to determine your creditworthiness. The three major consumer reporting agencies nationwide are Equifax, TransUnion, and Experian.

What is a FICO score?

Credit reports are used to generate a credit score. One of the most commonly used credit scoring formulas is the Fair Isaac FICO score, which ranges from 300 (low) to 850 (high). The higher your score, the more likely you will be approved for a new loan or offered a lower interest rate. Several factors from your credit history are used to calculate your FICO score. The national consumer credit bureaus do not disclose how the scores are calculated, so no one knows how they are determined. Agencies may have different information about your credit history, so your score may vary between agencies.

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