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From buying a pack of gum at the quickie mart to financing skyscrapers in New York, people use credit every day.
Module Transcript
Credit offers a way for us to get the things we want without having to carry cash, and it allows us to buy things we might not be able to afford all at once, like a home or college education, by allowing us to pay for the item over a period of time. What is credit? At the most basic level, credit is a promise that money borrowed will eventually be repaid. The lender, who's the one with the money, will usually charge interest for the use of the money. If a friend has ever asked you if they can borrow your money, you may have asked yourself "I like my friend, but can I trust him to pay me back?" Banks and credit card companies also ask themselves similar questions and have come up with a system to rate the likelihood that people will repay their debts. This system consists of your credit report and credit score. Your Credit Report and Credit Score
Remember when your teachers threatened to include your misbehavior on "your permanent record?" Your credit report doesn't keep track of detentions, but it does keep track of information about you and your financial history. A bad credit history will make it harder to get car loans, non-government education loans, home mortgages, and any other kind of loan. And the penalties don't stop there - if you are able to get a loan with a poor credit history, your loans will be more expensive since you'll have to pay higher interest rates. Banks, colleges, insurance companies, credit card companies, landlords, and even employers all have access to your credit report, so it's a good idea to maintain a good record. We've even heard of some cases where a job applicant has been denied employment because of a bad credit report. Each person's credit report contains their credit history for the last 7 years, including: - Social security number
- Date of birth
- Current and previous addresses
- Information about current and previous employers
- Information regarding bankruptcies, tax problems, etc.
- How much you borrowed through loans and credit cards
- Your repayment history
- Any accounts that have been turned over to a collection agency
Your credit score is a three-digit number that's very similar to SAT scores - they range between 300 and 850, with around 700 being average. Having a good credit score means you'll get more favorable interest rates when you buy a home or car; a poor score means you'll have to pay higher interest rates or you may be denied credit all together.
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