Credit isn’t just about getting a loan for a car or a home – it can also affect your ability to get a job. According to Consumer Affairs reporter Mark Huffman, debt has become the American way. People see spending as a patriotic duty to help the country recover from the Great Recession, as a way to express freedom and a way to prove independence. But before you go whipping out a credit card for the sake of the country, consider Credit 101: What You Need to Know.
Types of Credit
Credit basically falls into one of two categories – Secured Credit or Unsecured Credit. Secured Credit is a loan that is given in exchange for collateral and credit worthiness. Auto loans, mortgages and pawns are all types of secured loans. Typically, the interest rates for secured loans are lower than for unsecured loans. Unsecured loans are loans given based on your credit history and future predictions. These include credit cards, signature and personal loans.
Your credit score is a reflection of up to 5 factors, according to My FICO. But not all factors are weighted equally. Payments owed have a weight of 35%, amounts owed comprise 30%, length of credit history rates 15%, new credit is 10% and types of credit used are the final 10%.
Payment history looks at whether you’ve paid previous and current accounts on time.
Amounts owed is the total of the debts you owe. Having multiple credit accounts with balances does not necessarily mean you’ll have a low credit score.
Length of credit history refers to how long you have had credit accounts established, age of oldest and newest accounts along with average age of accounts, and how long it has been since you used these accounts.
The mix of credit accounts you have open is your types of credit in use. This can include credit cards, retail credit, mortgages, and installment loans such as auto or signature loans.
Finally, new credit is the amount of new credit you’re asking for or taking on. Requesting multiple credit accounts at once – such as activating a few new credit cards – is a negative for your credit score, especially if you don’t have a long credit history already established.
Living Within Your Means
One of the hardest things to do these days is to live within your means. People earning minimum wage don’t earn a living wage and come up with other ways to provide for their families. Many consider a home with a picket fence a sign of achieving the American Dream and borrow more than they are able to afford simply because they can. Credit.com states that the average American has more than $3,700 in credit card debt. Household debt is 67% of the GDP (Washington Post).
If you’re in debt over your head, consider credit counseling, either on its own or as a precursor to Chapter 7 or 13 Bankruptcy. That’s right. In order to file consumer bankruptcy under Chapter 7 or Chapter 13, you have to receive credit counseling from an approved nonprofit credit counseling agency within the 180-day period before you file. If you’re considering bankruptcy, be sure to contact a reputable attorney that specializes in bankruptcy and other financial matters.