Ten Basic Credit Terms Everyone Should Know

The credit system is a way for individuals and businesses to borrow money and make purchases on credit. It is an important aspect of the economy, as it allows people to make purchases they couldn’t afford upfront and helps businesses grow. However, it is important to use credit responsibly to avoid falling into debt.

Here are some key points to understand about the credit system:

1. Credit score:

A credit score is a numerical representation of an individual's creditworthiness. It is determined by a variety of factors, including payment history, credit utilization and length of credit history. A good credit score can make it easier to get approved for loans and credit cards and can cause lower interest rates.

FICO & Other Credit Scores: FICO and Credit Score are often used interchangeably, but they refer to two different things. FICO is a type of scoring and there are many other types of scores that vary among different credit bureaus (see #2) and credit products. We hear about FICO a lot because it's one of the most popular types of score used. There are a variety of ways to calculate your FICO score, and there are updates that change how it's calculated over time. There's also variation between base FICO scores and industry-specific FICO scores for auto loans and home loans. This gets complicated fast, and it's just one type of credit score, but as mentioned above, there are many types. Stick with AIO Credit Creation, and we'll help simplify it for you.

2. Credit reports:

A credit report is a detailed record of an individual's credit history. It includes information such as credit accounts, payment history and outstanding debts. It is important to review your credit report regularly to make sure it is accurate and to catch any potential errors or fraud. You can view your credit report for free, with some limitations, from the three credit bureaus: Equifax, TransUnion and Experian or from a free service such as CreditKarma or Credit Sesame, which makes it easier to check all three branches at the same time, along with other features.

3. Types of credit:

There are several types of credit, including revolving credit (such as credit cards or lines of credit) and installment credit (such as a car loan or mortgage). Revolving credit allows you to borrow up to a certain limit, make payments and then borrow again. Installment credit requires you to make fixed payments, at regular intervals, over a set period of time until paid in full.

4. Credit utilization:

A significant part of your FICO score, Credit utilization is a percentage of how much you owe vs how much credit was extended to you. For example: If you had a credit limit of $5,000 and you used and owed $1,000, your credit utilization would be 20%. For your credit report and score, all credit lines are taken into consideration for this calculation. It is important to keep your credit utilization low, as high utilization will suggest you are living beyond your means and not managing your credit well. According to NerdWallet, you want to aim for around 30% utilization for good credit and between 7% to 10% for excellent credit.

5. Collateral and non-collateral loans:

Collateral loans are easier to get and come with lower rates because the borrower has put up a piece of property, such as a house or parcel of land, as collateral. This property has value so it guarantees the lender will receive repayment because if the borrower doesn't pay the loan in time, the lender will confiscate the property to make up for those lost payments. This is also called a secured loan because the property provides security for the lender. Non-collateral or unsecured loans are not as easy to acquire and have higher rates because it is more of a risk.

6. Interest:

Interest is the cost of borrowing money. It is a percentage of the principal (amount borrowed). You will have to pay back the interest rate to the lender in addition to the original amount borrowed. It is generally noted on a yearly basis and is called an annual percentage rate (APR). The interest rate on a loan or credit card can vary depending on your credit score, the type of credit and other factors. This is not to be confused with the interest rates earned from certain savings and other accounts, which are called annual percentage yield (APY).

7. Credit fraud:

Credit fraud refers to any unauthorized use of your credit information. It is important to be vigilant about protecting your credit information, checking your credit report and reporting any suspicious activity to your credit card company or the credit bureau.

8. Building credit:

Everyone starts out with zero credit, so it needs to be built. It might seem better to never borrow money, but our financial system relies on credit for trust, so if you ever need to borrow, say for a car or a house, you must have credit and if you want low rates, you'll want that credit to be good. Credit isn't just for borrowing. Your apartment or a potential job may want to see your credit report to ensure security clearances or level of responsibility. Some ways to build credit include paying your bills on time, keeping your credit utilization low, only applying for credit when necessary or contacting a credit counselor or a professional credit building service like AIO Credit Creation to help with the process.

9. Credit responsibility:

It is important to use credit responsibly to avoid falling into debt. It is also important to regularly check your credit report, be vigilant about fraud and to try to build credit over time.

10. Credit Repair:

Credit repair refers to taking steps to improve a person's credit score and credit history. This can include disputing errors on credit reports, paying off outstanding debts and creating a plan to manage and pay bills on time. This process requires time, research, patience and paperwork, so many choose a credit repair company to assist. We here at AIO Credit Creation take on the majority of the repair process. Our specialists will guide you and our learning hub will teach you how to manage your credit for the future. Even our subscription plans are designed to help you practice good credit behavior over the course of a year so you won't have to worry about repairing

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