05 Credit and Borrowing
Learn how credit works, what credit reports and scores show, how borrowing costs add up, and how to manage repayment responsibly.
How works
allows you to use money now and repay it later. A lender may provide it as a loan, repaid in scheduled installments, or as a , such as a card, which can be borrowed from and repaid repeatedly up to a limit. Borrowing can help pay for major expenses, but it costs money and creates an obligation to repay.
reports and errors
A records borrowing and repayment activity, including accounts, balances, payment history, and collection accounts. reporting companies, often called bureaus, compile these records from information provided by lenders and other sources. The three largest U.S. bureaus are Equifax, Experian, and TransUnion.
Reports may differ because not every lender reports to every bureau or reports at the same time. You can request free reports through AnnualCreditReport.com. Review them for unfamiliar accounts, incorrect balances, or late payments you believe are wrong. If you find an error, dispute it with both the bureau and the company that supplied the information, and keep copies of relevant records.
scores
A is calculated from information in a to help lenders estimate the likelihood that a borrower will repay. Scores are not identical: scoring formulas, bureaus, and loan types can differ, so a score you see may not be the one a particular lender uses.
Commonly considered factors include whether payments were made on time, balances compared with limits, the age of accounts, recent applications, and the mix of accounts. Paying on time and keeping balances low are useful habits. Carrying a balance does not improve a score by itself.
Borrowing costs
The is the amount borrowed, and is the price paid for borrowing it. The expresses the yearly cost of as a percentage; for many loans, it includes the rate and certain required fees.
When comparing loans, consider the APR, loan term, monthly payment, fees, and total amount repaid. A longer repayment term can lower the monthly payment while increasing the total paid, so a low monthly payment does not necessarily mean a low total cost.
For example, a -card balance at a APR would accrue roughly in over a month if the balance stayed unchanged and were approximated monthly. Actual card may be calculated daily, and fees or payments affect the amount.
-card payments and offer terms
If a card offers a on purchases, paying the full statement balance by its due date can avoid on those purchases. Paying only the minimum keeps the account current but can make repayment much slower and more expensive.
Before borrowing, consider whether the purchase is necessary, whether the payment fits your budget, and what the full cost will be. Compare offers using the same loan amount and term. Read the agreement for introductory rates, variable rates, annual or origination fees, late-payment charges, and what happens when a promotional period ends.
Managing responsibly
Use only when you have a realistic repayment plan. Pay at least the required amount by the due date; when possible, pay more than the minimum or pay a -card statement balance in full. Set reminders or automatic payments if useful, and avoid borrowing up to your limit.
Apply for selectively, since repeated applications may affect some scores. If a payment becomes difficult, contact the lender promptly to ask about options rather than ignoring the bill.