Back to Basics #4: Credit

I have a pet peeve. Actually, I have more than one of them. My number one pet peeve? People who say “ATM Machine.” But running a close second is when people mistake “credit” and “debt” to mean the same thing.

I shouldn’t get so annoyed about it. Commercials, ads, banks… everyone throws the two words around all the time, and it’s easy to get confused. But if you have any interest in taking control of your own money, you ought to learn the difference.

Credit is the ability to borrow money. Debt is money owed. To give an example, if you knew that you could borrow $1000 from your parents at any time, that would be a line of credit. If you owed your parents $1000, that would be a debt.

Credit is important because it’s one of those “you need it to get it” things, especially if you’re trying to open up a larger line of credit, such as a mortgage.

There are some people that make a point of trying to live without credit. Since credit is the ability to acquire debt, people see it as a temptation. And to be fair, it is. However, I think it’s somewhat foolish to completely abstain from credit, because it’s become so ingrained in our modern lives.

The Dreaded Credit Score
Not only do you need credit to get credit, but you need to prove to creditors that you’re low risk. That you’ll pay them back any of the debt you incur on this line of credit. And unfortunately, you can’t just have your mom write you a note, vouching for you. Instead, creditors will pull up your credit score.

I don’t want to bore you too much, but your credit score is just a number, derived using “secret math,” that shows how responsible you are. A credit score can be pulled not only by creditors, but also by landlords when you’re applying for an apartment, and even by employers when you’re applying for a job. No joke – I just picked up an application for a job at the mall, and it came with a ” Fair Credit Reporting Act Disclosure.”

Since your credit score is so important to so many aspects of you life, you really ought to know what it is. This can get pretty confusing, because there are tons of different types of credit scores. The most common and most trusted, however, is your FICO score. Actually, there are even three different FICO scores, just to confuse you further. That’s because there are three different companies (Experian, TransUnion, and Equifax) that collect credit data on you and compute your FICO score from it. Lost yet?

Getting Your Score
If you want to grab one of you FICO scores, you can do it for free. MyFICO.com’s ScoreWatch* let’s you see your FICO score, and the credit report that is used to calculate it. It will also tell you what that score means to you, and offers a cool thing called Score Simulator, which will let you see how different actions (such as maxing out your credit cards, or paying off all your debts) would change your score.

ScoreWatch monitors your score and updates it daily. You can get the 30 day free trial, and cancel before the 30 days are up if you don’t want to continue monitoring your score. If you decide to continue on, you’ll be charged $90 for a year of monitoring. I would recommend this to anyone serious about improving your credit drastically over the course of the year. But if you’re simply curious about the score, you probably don’t need it past the 30 days.

Back To Basics is going to focus on credit scores and credit reports for a little while, so don’t be worried if this post left you with questions. For now, just check on your credit score, and be careful to protect it. That means no late payments, even on the electric bill!

*Affiliate link.