What Are Good Credit Habits?

What Are the Different Types of Credit?

There are a multitude of different types of credit in the financial industry today—whether it be revolving lines of credit, installment loans, credit cards, etc. The most important way to classify any particular type of credit is whether it is an unsecured (non-collateralized) or secured (collateralized) debt obligation. Designating credit as either unsecured or secured allows us to simplify its contribution to our credit worthiness since secured debts are viewed as more favorably than unsecured debts.

In terms of credit reporting and the impact to your credit score, secured debts and lines of credit would be categorized as a “good debt”, since the debt is asset backed and has a much more favorable impact on your credit worthiness. Unsecured debt on the other hand could be classified as “bad debt” since high reliance on revolving lines of credit is typically detrimental to credit worthiness.

What is a Credit Report?

A credit report is essentially the information collected by a credit reporting industry on your overall credit standing and credit worthiness. Credit Reports include the consumer’s personal information (name, address, etc.), credit history, accounts in collection, public records, credit inquiries placed, payment history, etc. These reports help creditors identify whether consumers are considered a good credit risk or not and should be approved for a particular line of credit.

What is a Credit Score?

A credit score is a three-digit number (objectively calculated by a credit bureau) that is used by lenders and credit card companies to predict the likelihood of someone paying them back. FICO and Vantage are the two most popular scoring methods used to derive a consumer’s credit score and ultimately their credit worthiness. Credit scores aren’t the only factor used by lenders to determine credit worthiness but they are typically the most important. Debt to income ratios also tend to play a significant factor.

What Are Good Credit Habits?

Good credit habits include always paying off any revolving lines of credit (i.e. credit card debt) at the end of each month and remaining within the grace period of your billing cycle. When you remain in the grace period you will not be charged interest on any charges made during the prior billing period. Other good credit practices include:

• Maintaining a low utilization (anything above 30% utilization rate will negatively impact your score each month)
• Retaining good repayment history (remain current and try not to make any late payments)
• Avoid inadvertently closing out any credit cards or lines of credit (even if you are not using them) as this will lower your total credit availability and may affect the length of time for which you have established lines of credit (10% of your credit score).