We recently asked the question on social media, “What is one thing that should be taught in school?”, several came back with the answer “credit.” Unless you are a financial guru at understanding complex financial terms, the world of credit can be slightly confusing. Understanding the most common credit terms and credit score terms could help you save money.
6 Common Credit Terms
1.Credit Mix
The different types of credit that make up your credit report. Your credit mix makes up 10% of your credit score and can be a mixture of credit cards, a mortgage to student loans and auto loans. Having a good mixture of positive credit can impact your credit score.
2.Credit utilization
This is the amount of available credit you are using. To calculate your credit utilization, you would divide your total credit card balances by your total credit limits. Then multiply that number by 100 for the percentage. Keeping your credit utilization under 30 percentage is best, by keeping it under shows lenders that you are capable of managing debt.
3.Installment loan vs. Revolving credit
An installment loan is a cash loan that requires a fixed number of regular payments that are equal in amount. Payments on an installment loan are calculated over a set duration, home loan and a car loans are examples of installment loans.
Revolving credit is credit that can repeatedly be used and paid off without having to reapply each time. Credit cards and lines of credit are two forms of revolving credit. Revolving credit does not require a set payment plan, and you can borrow up to your limit. Revolving credit is riskier for lenders. Therefore the interest rates are higher.
4.Hard Inquiry
A hard inquiry happens when you have applied for credit, and a business or lender “pulls” your credit report to determine your creditworthiness. This type of inquiry can affect your credit score.
5.Soft Inquiry
A soft inquiry occurs when a consumer checks their credit file or when a lender sends you a pre-approval letter. This type of inquiry does not affect your FICO credit score.
6.Payment History
35 percent of your credit score is made up by your payment history. Therefore it is a crucial element in your credit score. Payment history is calculated on how well you pay your bills and if you pay them on time. With payment history being such a big portion of your credit score being late on a payment or defaulting on a loan could cause you to be denied credit or have high-interest rates.
