K-State Research and Extension News
March 03, 2014
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Knowing the Basics about Credit


Fact sheet pulls together resources.

OLATHE, Kan. – Recent news of data breaches involving Target and Neiman Marcus credit cardholders serves as a reminder that a little time spent learning about your credit – including monitoring it and knowing what others see and how they use it – can mean money saved and less stress in the long run.

There are benefits to building credit, to be sure, but your responsibility does not end when you fill out the application and get the card or loan, according to Kansas State University’s Valeria Edwards, who said it’s important for anyone who uses credit to pay on time and monitor their own credit reports for accuracy.   

“When managed successfully, a home mortgage, student loan or credit card account can mean benefits such as home ownership or a college education,” said Edwards, a family and consumer sciences agent with K-State Research and Extension. “But poor decisions when it comes to managing credit can mean higher costs and lost opportunities.”    

Edwards wrote “Know Your Credit,” a free four-page fact sheet available online.

Importance of the Credit Report

“Many times people don’t understand the difference between their credit reports and their credit scores. They think they need their credit score, but what they really need is to get their credit report,” Edwards said. “It’s important to review it and make sure it’s accurate. If it’s accurate and they’re paying their bills on time, they don’t really need their credit score – it will take care of itself.”

A credit report is an explanation of your credit history, she said, including when and where you applied for credit, from whom you borrowed money, and who you still owe money to. It also shows if you’ve paid a debt in full and if you make monthly payments on time.

There are three national credit reporting agencies – Equifax, Experian, and TransUnion. Each is required by law to provide consumers with a free copy of their report each year. Those reports can be obtained from all three agencies at Annual Credit Report or by calling 1-877-322-8228.

Edwards suggests requesting your credit report from a different credit reporting agency on a rotating basis, one every four months, which allows you to review your credit history frequently and regularly without charge. There is typically a charge for requesting your credit report from a particular agency more frequently than once a year.

Be wary of impostor credit report websites, which often claim to provide free credit reports or free credit scores. The “free” product may come with strings and fees attached. One website Edwards does recommend, however, is Credit Karma.

Something else to be aware of, she said, is that your application for a mortgage or to rent an apartment may be accepted or denied, based on your credit report. And it goes further than that. Utility companies may charge deposits based on your credit score. Many employers check credit reports before offering a job.


Credit Scores are based on Credit Reports

Your credit score is a number that helps lenders and others predict how likely you are to make your credit payments on time, Edwards said. The score is based on the information in your credit report.

Typically, when a lender talks about your credit score, they mean the FICO score developed by the Fair Isaac Corporation. FICO scores range from 300 to 850. The higher the number, the better the score. Most people score in the 600 to 700 range, and a score of 750 or higher is considered excellent by most lenders, she said.

Lenders buy your credit scores from the three credit reporting organizations.

The five factors that commonly affect a credit score are payment history (how consistently you pay your bills by the due date); amount owed (the amount you owe your creditors compared to the amount of credit available to you); length of credit history (the length of time you have used credit); new credit (the number of recent credit inquiries and opened accounts); and types of credit (for example mortgage, revolving such as credit card or installment, such as a car loan).

“Scores change over time as payment histories, outstanding balances, and amounts of available credit change. They can affect whether you can obtain credit, interest rates you pay for credit card purchases, auto loans, and other kinds of credit, so they can directly affect the total price you pay for goods and services,” Edwards said.


Open or Close?

“Another misconception people have about credit is that if they don’t use a credit card anymore they must close it,” Edwards said. “If you don’t use the card anymore, sometimes it’s best to cut it up or put it in the freezer in a block of ice to make it less accessible, but leave the account open, don’t close it. A long credit history can positively affect a credit score. If you’ve had a credit card for 25 years and close it and your next oldest one is five years old, it will look like you’ve only had credit history of five years.”

That’s especially true for a young person who only has credit cards, she said: “Keeping a card open and using it sparingly could be the better strategy.”

“The single best way to build a good credit history and build your credit score is to pay at least the minimum payment on time,” she said.

Edwards writes about consumer financial literacy and other topics through the Johnson County K-State Research and Extension website and on Facebook.

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K-State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well-being of Kansans. Supported by county, state, federal and private funds, the program has county Extension offices, experiment fields, area Extension offices and regional research centers statewide. Its headquarters is on the K-State campus, Manhattan.

Story by: Mary Lou Peter
mlpeter@ksu.edu
K-State Research & Extension News

Valeria Edwards – 913-715-7000 or valeria.edwards@jocogov.org