5 common credit terms you should know

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5 common credit terms you should know


Your credit can open or close a lot of doors for you. But along with credit comes a variety of terms that can seem confusing. Credit report, credit score, credit utilization ... what do all these terms mean? How are they different from each other?

As part of Dictionary Day on Oct. 16, we're breaking down some common credit terms you should know into plain English.

1. Credit score

Your credit score is a three-digit number that represents your overall credit health. Credit scores generally range from 300 to 850 with 850 being the highest potential score. Lenders typically consider a score of 700 or higher as good.

Credit scores are meant to give lenders a snapshot view of your credit. In other words, how likely are you to be a responsible credit user and pay back your loans on time?

Factors such as payment history, how much you owe, credit type, length of credit history and new credit can all affect your credit score. There are many credit-scoring models out there, which means you could receive different scores from different places.

Knowing and working on building your credit score is important, as it's used in a variety of situations, and it could impact your ability to rent an apartment or get a credit card or loan.

2. Credit report

Your credit report is a comprehensive record of your credit history provided by a credit bureau. There are three main credit bureaus: TransUnion, Equifax and Experian.

"You may also see credit reports referred to as 'credit files,'" says Nancy Bistritz, director of public relations and communications at Equifax.

Unlike your credit score, which offers a snapshot view of your credit, your credit report provides in-depth detail about your payment history, how much credit you currently have and much more.

It's important to regularly check your credit report to see where you stand and ensure there are no errors. If there are errors on your credit report, you can dispute them.

With Credit Karma, you can access your credit reports from TransUnion and Equifax for free. You can also dispute items on your report directly with TransUnion through Credit Karma.

3. Credit utilization

Your credit utilization rate refers to how much of your available credit you're using. You can calculate it by dividing your total credit card balances by your total credit card limits then multiply by 100 to get the percentage.

Here's an example:

You have one credit card with a balance of $1,000 and a limit of $5,000.Your second credit card has a balance of $500 and a limit of $2,000.

Divide your total balance ($1,500) by your total limit ($7,000) then multiply by 100 = 21 percent.

Try aiming for a utilization rate below 30 percent if you can. "Maintaining low credit utilization can show lenders that you're able to manage debt, which can have a positive impact on your credit score," says Heather Battison, a vice president at TransUnion.

4. APR

If you've ever looked at your credit card statement or an ad for a credit card, you've probably seen the acronym "APR." But what does that stand for -- and more importantly, what does it mean?

APR stands for annual percentage rate, and it determines how interest accrues on things like your credit card or auto loan. In other words, it's the percentage in interest and fees you'll end up paying on your loan annually.

Your credit card may have several APRs you should be aware of. For example, you may have an introductory 0 percent APR for a certain amount of time, and if you violate the terms of the card then a penalty APR, which is usually much higher, may kick in.

It's important to read the fine print on any credit cards you have or are interested in, as your APR determines how much interest you may pay if you carry a balance or miss a payment.

5. Credit history

Your credit history is a record of how you've managed -- and are currently managing -- your credit accounts, including credit cards, student loans and other loans. It doesn't include information like your income.

Your credit history is important because it helps lenders determine how responsible you are with credit and whether you're likely to repay debts in a timely manner. It tracks things like your on-time payment history, whether any of your accounts have gone into collections and if you've ever had to file for bankruptcy.

Your credit history will be illustrated in your credit report and your credit report may show your credit history from multiple sources, including banks, utilities and landlords.

Bottom line

Credit may seem confusing, but it doesn't have to be. If you want to better understand how credit works, start with these five common credit terms.

Knowing what they mean and how they can affect your financial life is an important part of being in control of your future finances.

About the author: Melanie Lockert is a freelance writer and event planner currently living in Los Angeles. She is the author of Dear Debt: A Story About Breaking Up With Debt. She has been featured on Oprah, Huffington Post, Business Insider, The Globe and Mail and more.

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Will someone explain to me why credit utilization should be below 30%?  If the credit card company doesn't want you to use 100% of your credit limit why not just give you 70% less credit?  It's like if I fill up my gas tank but my car insurance goes up if my fuel gauge goes below 75%.  Or if I go to a restaurant my bill goes up if I eat more than 30% of the food ordered.  This criteria of credit utilization seems  whacked.

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I don't think it's that the credit card company doesn't want you to use 100% of it it, it's styaing below 30% will increase your credit score the most.  It shows the credit agencies you can manage the provided credit. 

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