Understanding Credit

Chapter 3, Lesson 1

Achieving Financial Wellness

2

Manage your credit for a healthy financial state. Using credit for purchases is commonplace in our financial environment. Credit can be an important and helpful tool in your money management, but can also be a major pitfall when used incorrectly. This lesson will help you understand the importance of good credit for your financial well-being.

CreditCredit is the ability to make purchases before you actually pay for them under promise of payment in the future. In order to use credit, you are also required to pay interest and fees based on a prearranged agreement related to payment.

Credit ScoresIf you have ever had a credit card, applied for a loan, or even set up a bank account, these actions likely generated a credit score for you. Financial institutions you interact with provide your information to credit bureaus who in turn calculate a number that represents your creditworthiness.

Your credit score can have a huge impact on your financial wellness. A high score will help you qualify for loans; obtain lower rates on credit cards, mortgages and insurance; and even help you qualify for housing. A lower score may make it difficult for you to borrow money when you need it and will also likely mean you will pay more for the money you are able to borrow. It can even impact your ability to get certain types of employment!

What Kinds of Financial Behaviors Impact Your Credit Score?• Paying your bills on time! Late payments

negatively impact your credit score.

• Time plays a role: The longer your credit history and consistency of payment, the better your score. If you have a long history of missed or late payments, the lower your score.

• Stability in your home and job: Having consistent employment and housing will improve your score.

• Too much credit: Lenders will worry that you can access more than you could pay back.

• Too little credit: You can’t build a high credit score without showing you can responsibly use credit. If you have no credit history, apply for a credit card and make payments on time to establish your credibility.

• Negative credit history: Late payments, collections, etc. will be reported and will negatively impact your score.

Next Steps1. Read Lesson 2 “What Is Your Credit Score and

What Does it Mean?

2. Check your credit report

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