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Top Credit Terms That You Should Know About

David Warner

David Warner

Financial Advisor

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Credit can be an incredibly sensitive subject that many people don’t want to talk about. The reality is though, this is directly attributed to the lack of knowledge or experience with credit, budgeting, and investment. If you are wanting to transform your credit report or credit score, it all begins with this: knowledge.

We understand that when you first open up a new account, you are often bombarded with language and lingo that makes absolutely no sense. From FICO scores, investing, banking, rates and charges, and other information, it can be overwhelming and frustrating.

So, in today’s article, we are going to review some of the most common credit terms and concepts that are often bombarded at consumers when they open up a credit card or loan. Our goal is remove the stress and usher in a new type of motivation and confidence when it comes to credit and loans.

Payment History

One term that will frequently be discussed when opening a credit card or loan is your payment history. As the name implies, this has to do with what you credit payment history looks like. This is essentially a collection of all of your payments for all things credit. For example, if you lease a car, pay a mortgage, or anything of this nature, it will show up as payment history. The credit bureau and other lending companies can see your payment history, how consistent you’ve been, and judge whether you are a trustworthy borrower. This concept takes up over 35% of your total FICO credit score, making it pretty important.

Installment Credit and Revolving Credit

One credit term that is commonly misunderstood is installment credit and revolving credit. These two terms are often intertwined and thought to be the same thing; however, they are gravely different. An installment loan is one that is predetermined and has an end-date. In other words, this is a loan that will end after consistent monthly payments. A great example of this would be a mortgage or car loan. These are two types of loans that will end and cancel upon completion. Revolving credit, as the word revolving implies, will not end. Revolving credit is something where a specific amount of money is lent to a borrow and you may re-use it, only when you pay it back. In other words, it’s a credit card or line of credit. These revolving credit programs have no end day – only a payment plan. It’s important to know that these programs have higher interest rates.

Credit Mix

Credit mix is a very simply credit term that is tossed around in the industry. This refers to the different types of credit that can be found on your credit report. In other words, do you have a mortgage loan, car loan, credit cards, student loans, store credit card, or even an equipment loan? The credit mix is a concept and term that is taken into consideration when compiling your credit score. While it may not have a strong impact, 10%, it is still important enough to know about.

Hard Inquiry vs. Soft Inquiry

Inquiries, at the core, are marks that are reported on your credit report by establishment when you either attempt to open a new line of credit, extend a line of credit, or happen to check your credit score or report. However, there are two different forms of inquiries, hard and soft. These two terms are commonly mixed up, so we will clear that up for you as well. A Hard inquiry is a mark for when an individual tries to open a new line or extend a line of credit. This type of inquiry is more important as it may impact your credit score. Soft Inquiries on the other hand are marks reporting when your credit report is pulled. This will not impact your credit score, even though it’s reporting on your credit report. One note to consider: these marks should only stay on your credit report for two years. This is why it’s always good to check your credit report!

Credit Utilization

In our opinion, credit utilization is one of the most important credit terms and concepts for credit holders to know. Credit utilization is a concept of how much credit you have used in comparison to how much credit you have been granted. For example, if you have been given a limit of $10,000 and only used $3,000 of credit thus far – your utilization is 70%, which is decent. Credit utilization provides a wealth of information to lenders, such as how responsible you are, how you handle debt, and what type of spender you are. In our experience, credit utilization is one of the first areas that businesses will take into consideration for approving a loan or extended one.

Annual Percentage Rate

The last concept on our list for today is APR, or annual percentage rate. This is a term that is tossed around in the credit and loan industry, especially in commercials. Have you ever heard of this: 0% APR for the first 12 months! Typically, companies use this as a marketing technique; however, most people have no idea what this really means. APR represents a percentage of how much you owe, combining both fees and interest rates, in a given year. APRs can be found on credit cards, mortgages, and many other types of loans. One word of caution, when dealing with credit card APRs, they will not note your fees – only your interest rates of what you will be paying.

Expand Your Knowledge of the Credit Industry

With these credit terms and concepts, you can begin to see how the credit industry truly functions at an even deeper level. Now, your goal as a consumer and credit holder is to continue to expand your knowledge of the credit industry. This is truly the best way that anyone can begin to make credit work for them, and cast aside the fear and negative connotations casted on the industry. With that said, if you are ready to learn some new information on the credit industry, check out this article here!