CREDIT BASICS

Stepping Stones in the Koi Pond

Types of Credit

INSTALLMENT

 

Set $$$ borrowed

Set time period to pay off

Set monthly payments

Paid off = account now closed

REVOLVING

 

Set $$$ credit limit

Charge purchases up to limit

Pay down balance monthly

Repeat = account open indefinitely

Active vs Inactive

An active installment account has a balance and required monthly payment.

If paid in full, or deferred, or defaulted, the installment account is now inactive. 

An active revolving account has at least one payment made in the last six months. 

If no payments are made in 6 months, the revolving account is now inactive.

Test your knowledge: which are installment accounts? 

 

A. Student loan
B. Checking account
C. Auto loan
D. Savings account

Answer:

Student loan and auto loan

Test your knowledge: which are revolving accounts? 

 

A. Personal line of credit
B. Rent-to-own products
C. Prepaid card
D. Credit card

Answer:

Personal line of credit and credit card

How much credit history is enough?

NO HISTORY

 

> No accounts or activity in past 7-10 years

> No recent use of credit

> No collections or public records

THIN FILE

 

> Credit history is too young, less than 3 years

> Or less than 3 accounts

> Or no/few collections and public records

THICK FILE

 

> Credit history is old enough, 3 or more years

> Three or more accounts

> Or some collections and public records (but not a good thing!)

TIP

If possible, build a thick file of good credit history. Businesses want to see enough information to make a decision on credit risk. They still take customers with no histories or thin files, but think it's riskier - so they charge higher fees and interest rates.