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Credit

couple checks credit score on computer

What is Credit?

Credit is an agreement between a lender and a borrower that allows the borrower to obtain funds, with a promise to repay it later, often with interest.

Credit plays an important role in managing your personal finances and achieving your financial goals. It is often offered by credit unions, banks, lenders, and credit card companies, and approval or denial is based on factors such as income and your credit management history. Lenders, insurers, employers, and others may obtain a copy of your credit history from credit reporting agencies to assess how you manage financial responsibilities.

Why is Credit Important?

Credit is important because it provides you with the ability to access financial resources and opportunities that may otherwise be out of reach. However, it's crucial to use credit responsibly and understand the costs and risks associated with borrowing.

Three Common Types of Credit

  • Revolving Credit

    Allows you to have a line of credit to make purchases with as long as you stay within your credit limit and pay your balance off on time. You may use this type of credit again and again, as long as you stay within the credit limit or until you close the account. Credit cards are the most common example of revolving credit.

  • Installment Credit

    This credit is borrowed in a lump sum and then repaid in fixed monthly installments over a set period until paid in full. Examples of installment credit include car loans, mortgages, student loans, and personal loans.

  • Open Credit

    Provides access to a certain amount of credit that needs to be paid in full at the end of each period, usually monthly. Because the balance must be paid off by the due date, this credit rarely appears on credit reports and doesn’t accrue interest charges. If the balance is not paid in entirety, however, there can be late fees, other penalties, and derogatory remarks on credit reports. Examples of open credit are utility bills and charge cards.

What are the Risks Associated With Credit?

Credit provides people with the ability to access resources and opportunities that would otherwise be out of reach. However, it's crucial to use credit responsibly and understand the costs and risks associated with borrowing. For example, consistently using credit for everyday purchases may make you lose sight of your budget and lead to overspending. When the balance is larger than your budget, interest will accrue, making those items more expensive if the balance is not paid off each month. Being mindful of your budget is one strategy for keeping spending in check and reducing or eliminating interest payments.

Credit Reports & Credit History
Credit Scores

Know Your Rights: Securing Credit

The Equal Credit Opportunity Act (ECOA) was a groundbreaking piece of legislation that protects you against discrimination when securing credit. If you have been denied credit, and have concerns of suspected credit discrimination, report your concerns to your credit union. Sometimes you may be able to persuade the credit union to reconsider your application. Read our blog to learn more about what options you have.

Read the ECOA Blog

Frequently Asked Questions

You can initiate a dispute by searching for the contact details of one of the three major consumer reporting agencies: TransUnion, Equifax, or Experian, or by directly contacting your credit union. To file a direct dispute with your credit union, you need to send a formal notice to the address provided by the credit union on your consumer report, or an address specifically indicated for dispute submissions. If no such address is available, you may send your notice to any business address associated with the credit union. Your dispute notice should include specific information, such as enough details to identify the account or relationship in question, the exact information you are disputing, and your reasons for the dispute. Additionally, consumers must include any supporting documentation or relevant information requested by the furnisher to substantiate their dispute. This may include items like a copy of the relevant section of the consumer report that contains the disputed information, a police report, a fraud or identity theft affidavit, a court order, or account statements.

A consumer report can be requested by a credit union when you seek to obtain a loan, which includes credit for making a purchase. In this scenario, the credit union has a legitimate purpose for seeking the report and does not require specific authorization, regardless of how the credit application is submitted—whether in person, by phone, by mail, or online. Importantly, the fact that credit is ultimately not granted does not make the request for a credit report improper. The credit union does not violate your privacy by obtaining your consumer report when you seek a loan nor are they required to obtain your permission when they report information about your payment performance to a consumer reporting agency.

The credit union can report your personal information to the consumer reporting agencies in accordance with Regulation P, which allows the credit union to report information about you to a consumer reporting agency. Also, under Regulation P, you have no right to opt out of having the credit union report your personal information to the credit reporting agencies. Regulation P does not apply when a credit union discloses nonpublic personal information to a consumer reporting agency in accordance with the Fair Credit Reporting Act.

It is important to note that the credit union does not calculate your credit score, but the national consumer reporting agencies use proprietary software to determine how the score is calculated using a scoring model. FICO is just one of many scoring models. FICO has identified the following categories and weights of each factors used to generate FICO scores: 

  • Payment History (35%); 
  • Amounts Owed (30%); 
  • Length of Credit History (15%); 
  • New Credit (10%); and 
  • Types of Credit in Use (10%).

When a lender tells you that your credit utilization is high, that means you are using a large percentage of your available credit. This can have a significant negative impact on your credit score. Being aware of this can help you make more cautious financial decisions. Credit utilization is a critical factor in determining your credit score. Lenders might be less willing to extend new credit to you, or they may offer less favorable terms, such as higher interest rates.

Installment loans (mortgages, auto loans, student loans and personal loans) are not included in the credit utilization ratio. These loans are repaid over a fixed period with set monthly payments. They affect your credit score through your payment history and the overall amount of debt you carry, but they are not part of the utilization calculation.

Your credit utilization ratio includes only revolving credit accounts. Examples of these accounts are credit cards, personal lines of credit, and home equity lines of credits (HELOCs).

Your credit utilization is calculated by comparing the amount of credit you’re using to your available credit. Here’s how you can calculate it.

  1. Add Up Your Balances – Sum the balances on all your credit cards.
  2. Add Up Your Credit Limits – Sum the credit limits on all your credit cards.
  3. Divide and Multiply – Divide the total balance by the total credit limit, then multiply by 100 to get a percentage.

For Example: If you have a total balance of $2,000 and a total credit limit of $10,000, your credit utilization ratio would be 20%. If you have a total balance of $3,500 and a total credit limit of $10,000, your credit utilization ratio would be 35%. Using below 30% of your available credit or your credit limits is suggested because using less is better for your score.

A FICO score is a type of credit score created by a specific algorithm used by the Fair Isaac Corporation (FICO). It’s one of the most widely used credit scoring models by lenders to assess risk. A credit score is a numerical representation of your creditworthiness, which is a measure of how likely you are to repay a loan. It’s based on your credit history and helps lenders assess the risk of lending you money. Lenders may use different types of credit scores depending on their preferences, the industry, and the specific type of credit or loan you are applying for.

A hard inquiry means that someone has requested to look at your credit report to determine your creditworthiness. Hard inquiries typically occur when you apply, for instance, for a new credit card, car loan or mortgage. Hard inquires will show up on your credit report and may stay there for two years. Additionally, hard inquiries may lower your credit score.

Last Modified on 12/31/24