Credit: Do you understand it?
Understanding how credit works is the first step toward building it, improving it, and making it work for you.
Credit is an important part of your financial well-being. Good credit helps you apply for and secure loans. But it's not something that just appears overnight. You have to build it up over time. So, what do you really know about credit? Take this quiz and see where you stand. Then review some common concepts and terms.
1. How do you define credit?
A. Free money
B. Money lenders will let you borrow
C. Money you currently owe lenders
D. The total amount of money you've borrowed in your lifetime
2. Which of the following is a common type of credit?
A. Inverted credit
B. Freestanding credit
C. Revolving credit
D. Invisible credit
3. What is the best way to establish good credit?
A. Get a high-paying job
B. Pay off your student loans
C. Avoid borrowing money unless you really need it
D. Start with a secured credit card
4. Which of the following factors is most likely to affect your credit score?
A. Your annual salary
B. Your credit history
C. Your net worth
D. Your age
5. Who can ask to see your credit report?
A. A bank
B. An employer
C. A landlord
D. All of the above
6. Which of the following is most likely to be considered an excellent credit score?
(Answer key: 1: B. Money lenders will let you borrow; 2: C. Revolving credit; 3: D. Start with a secured credit card; 4: B. Your credit history; 5: D. All of the above; 6: C. 800)
What is credit?
Credit is the amount of money that lenders will let you borrow. Because a lender is taking on risk when it lends you money, the lender generally wants to know how likely it is that you’ll repay it.
How is it used?
To assess that risk, a lender will generally look at your credit report and credit score. Other people may look at your credit report besides a bank, like an employer or landlord, since it can help them assess your financial stability.
What is a credit score?
Your credit report includes a great deal of information about your borrowing, such as how much you borrowed, when, and how you did paying it back. This information, including your credit history, is analyzed and used to create a credit score. This score generally ranges from 300–850; a higher number translates to higher creditworthiness.
Do you have credit?
If you haven’t borrowed money before, you likely don’t have a credit report or score, which can make borrowing harder in the future. To start building credit, consider a secured credit card.
Are there different types of credit?
How credit is categorized generally depends on how it’s paid back. One of the most commonly used types of credit is a revolving credit account, where you make payments each month, and are charged interest on what you don’t repay. Credit cards are a type of revolving credit.
Credit can be complex, but is important to understand. Read our guide to building and maintaining a good credit score.