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Introduction to Credit
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Provided by the Credit Issues Projects of the Young Lawyers Division of The Virginia Bar Association

What are credit and debt?

Credit is the ability to borrow money.

Debt is the money you owe someone else.

Having the ability to borrow money allows you to make large purchases without having to save the money to pay on the spot. Most young people don’t have $10,000 in savings to buy a car, but with credit they can borrow that money and agree to a timeline to repay it with interest.

To borrow money from others, a lender will want to know the risk involved. A credit report is an accurate way for lenders to get the information they need to determine that risk. Credit reports are issued by several agencies. The major three are Equifax, Experian and TransUnion. Each of them receives information from lenders and collects information from public records.

A credit report contains information on your:

  • identity,
  • credit history,
  • requests for your credit,
  • financial public records.

Types of information not included are income, account balances, medical information, or race/gender/religion/ nationality. The credit report also includes your credit score.

A credit score is a number provided by credit reporting agencies that helps lenders determine the terms (amount, payment, interest rate, etc.) of lending money. There are two types of scores: FICO Score and VantageScore. A FICO Score ranges from 300 to 850 and is the main score used by lenders. A VantageScore is a newer model ranging from 501 to 990 with a letter grade (A through F). A higher number is a better score.

Get your credit score

The three agencies report your score upon request. Each year you can request one free report. Each additional report likely will cost money. Additionally, if you have a credit card, you may be able to track your score through its services free of charge.

Create a budget

What are your goals? Whatever you want to do with your money, take a few minutes to figure out how much it will cost and how much you’ll need to save.

Take a look at your income and expenses (rent, gas, car maintenance, food, etc.) as well as taxes and insurance. Be conservative in determining how much you’re really making to reach your goal.

Improving and building credit

Everyone starts with no credit, so to build credit you need to borrow. Talk to a family member or another responsible adult about getting a credit card or secured card. The Credit CARD Act bans credit card approvals for anyone under 21 years old without a co-signer or proof of sufficient income. Before you get a card, make sure you can pay what is due. Missing a payment will show on your report for a long time.

It may seem obvious, but the best way to improve your credit is to pay off your debts. If you have a credit card, paying the full balance instead of the minimum will help build credit and allow you to avoid interest fees. A late or missed payment will decrease your credit score and cost you late fees and interest.

Keep track of your credit score and review your statements.

Too many lines of credit (for example, credit cards) can have a negative impact on your credit, if there is a balance on them. It is better to have just two to three credit cards and manage them responsibly.

Example of the impact of interest

When considering a credit card, it’s important to read the fine print. The offers made generally are temporary, meaning the terms will change after a relatively short time.

For example, you may see an offer for 0% APR (Annual Percentage Rate) for 1 year. This means that the amount owed will not be charged interest fees for 12 months. However, after the year, the rate will increase. The average APR for new credit cards is around 16%, as of September 2017.

Say you bought a new TV for $500 on your new card. You plan to pay it off with $30 per month. After 12 months of no interest, the balance would be $140. The next month, after the $30 payment, the balance would be $132. The next month would be $123. This extends the time to completely pay off the balance by several months and adds roughly $100 (20%) to your overall cost for the TV.

Find more information

Visit your bank or credit card company’s website.

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