Know the difference between how much you owe (debt) and how much you can borrow (credit). Learn how to manage both to avoid financial trouble and understand how credit scores are calculated.
Most lenders use FICO credit scores, although some use a rival credit score called the Vantage score. The type of FICO or Vantage score can vary depending on the type of loan being applied for. For example, lenders use a specific score variation from one of the major score providers for credit cards vs a mortgage or home equity line of credit.
The most important components of credit include history of on-time payments, types of credit owned, amounts owed and credit utilization. Another thing that goes into a person’s credit score is the length of credit history, which means the age of the oldest account on file.
A credit card is a card-based form of payment that has a revolving credit line. It is different from a line of credit that is typically a standalone loan with a set loan amount that can be accessed as needed with a check. Once a check is written against a line of credit principal and interest is paid back in installments.
Credit scores can be positively or negatively affected by consumer behavior such as paying balances owed on or before the due date, the percentage of utilization of credit lines and the number of credit accounts that are open.
Lenders report the opening and maintenance of credit accounts to credit reporting companies each month that accounts are open. Account balances, payment behavior and account status (such as current, overdue or in default) are also reported.
Credit refers to the extension of financial borrowing privileges from one individual or organization to another. Ultimately, credit is based on trust between the lender and borrower that the amount owed will be repaid. Credit generally entails measurement and verification of the creditworthiness of the borrower by the lender.
A hard inquiry refers to a lender pulling a full credit report on an individual from a credit reporting company in order to determine their creditworthiness for a loan or revolving line of credit. A hard inquiry can temporarily lower the credit applicant’s credit score as where a soft inquiry, which entails a more cursory view of a borrower’s credit, does not.
Credit rating generally refers to an individual’s creditworthiness as measured by a credit score. It can also apply to corporate entities as it relates to the ability of a company to borrow money in the capital markets or issue debt instruments such as corporate bonds.
Credit history is the accumulated credit account behavior of an individual that is tracked by credit reporting agencies. Lenders such as banks and credit card issuers report their customers’ accounts, credit usage and payment behavior to credit reporting agencies such as Experian, Equifax and TransUnion each month, forming credit profiles.
Credit quality is another term for creditworthiness, meaning the level at which lenders assign credit amounts and terms based on risk level. Banks and other types of lenders measure credit quality objectively using credit scores based on factors such as types of credit owned, on-time payment history, credit utilization and age of credit.
Buy Now, Pay Later, also known as BNPL, is a relatively recent take on the old layaway plans of the past. However, unlike layaway plans, Buy Now, Pay Later allows the buyer to take possession of the goods immediately and break up payments into four equal installments over a short period of time.