Within the personal financial world, few concepts are more important than credit. From obtaining loans of various types to opening up a new credit card or line of credit, there are numerous reasons why credit is an important topic — and a few basic terms you should be aware of if you’re utilizing credit in any way.
At Diversified Members Credit Union, we’re proud to assist clients with credit needs and questions in numerous areas, from our mortgage loans and other loan types to credit card applications, business credit and many others. We’ve also helped many clients who are still learning about credit to understand exactly how this realm works, as well as familiarize them with terms and jargon that are valuable within this world. This two-part blog series will go over a number of basic credit terms to be aware of.
Perhaps the most important single number within the world of credit is your credit score. You’ve likely heard your score mentioned at one time or another, but what exactly is it?
Simply put, a credit score is used by lenders to gauge the financial stability of an individual — essentially, if you’re able to manage your debt well and often pay back loans on time, that’s a good indication that you’ll be a good candidate for a new loan at a reduced interest rate. Credit scores range from 300 to 850, with the higher the score, the better the chance of getting approved for a loan. Many lenders use FICO scores specifically, which are based on information in your credit report.
Conversely, if you have a history of not paying back loans in a timely manner, that’s going to hurt your credit score and make it harder for you to obtain loans in the future — if possible at all. For this reason, it’s important to check your credit score on a regular basis and make sure that, if there is a problem with your score or it doesn’t meet the standards set by lenders, you get to work on improving your credit right away.
Another term you may come across in regards to your credit score is the idea of an inquiry. An inquiry is essentially just information about your credit, such as a new loan or credit card application — it’s the reporting of an event to the credit bureaus. While inquiries may make up less than 10 percent of your credit score, they can be important to monitor. If you’re applying for multiple loans at once and too many inquiries appear on your report within a short period of time, it may appear as if you’re in some financial trouble and could hurt your chances of being approved for new loans.
Short for annual percentage rate, this is the annual cost of borrowing money to use for credit purposes. While you may see APR associated with mortgage loans, it can be used for nearly any type of loan that has an interest rate attached to it — including credit cards and store charge cards.
With many loans, such as mortgages, business loans or even auto loans, the APR will usually be fixed throughout the life of the loan, meaning that interest rates won’t change. With credit cards and other types of loans, however, your APR may vary over time depending on market conditions or even with what’s happening in your personal financial situation.
For more on important credit terms to know, or to learn about any of our credit union services in Detroit or other areas, speak with the staff at Diversified Members Credit Union today.