6 Common Credit Terms You Need to Know
, by Rob Kaufman
From FICO® Score basics to more complex credit score words, understanding these common credit terms can help save you money.
Let's face facts: unless you're a fiscal whiz or were born with a special talent for understanding complex financial terms, the world of credit can often be confusing. This is especially true when it comes to common credit terms and credit score terms.
For instance, are you 100% sure what APR means? Do you know what's meant by your "credit mix" and why it's so important? What about "installment loan" or "revolving credit" - do they sound familiar, yet lack a concrete definition?
Fear not. We've compiled here a list of 6 credit terms that are extremely common but often misunderstood. Of course, if there are other terms you've heard that aren't listed here, you can always check our Glossary of Credit Report Terms.
The Top 6 Common Credit Terms are...
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APR.
The A nnual P ercentage R ate is the percentage of interest and fees you'll pay on a credit card, mortgage or other types of loan throughout an entire year. A credit card APR tells you the interest rate you're paying, but doesn't include the effects of compounding interest or other fees like annual fees and balance transfer fees. A mortgage loan APR includes more than just interest charges and you need to look carefully at what additional fees a lender may include. Check the APR of credit cards and loans carefully so you'll always know exactly what you'll be paying.
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Credit Utilization.
Simply stated, this is how much of your available credit you're using. And it's easy to calculate, too. For instance, to calculate the credit utilization of your credit cards, just divide your total credit card balances by your total credit card limits. Then multiply that number by 100 for the percentage. It's best to keep your credit utilization below 30% since lenders see a low percentage as a sign that you're capable of responsibly managing debt.
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Credit Mix.
This term is used to define the different types of credit that make up your credit report. From credit cards and student loans to mortgages and auto loans, your credit mix has an impact on your credit - accounting for 10% of your FICO® It's important to remember that although a good mix of credit can have a positive impact on your credit score, it's not wise to apply for credit you don't need.
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Hard Inquiry.
A hard inquiry occurs when you've taken an action (i.e., applied for credit) and a business/lender "pulls" your credit report in order to review your credit. This type of inquiry can affect your FICO® On the other hand, a soft inquiry doesn't affect your FICO® Score because it isn't generated by applying or shopping for credit. An example of a soft inquiry is your checking your own credit or a lender sending you a "pre-approved credit offer" without your applying.
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Installment Credit/Loan (vs. Revolving Credit).
An installment loan has a pre-determined length, an end date (the loan's "term") and is repaid with scheduled, periodic payments. The loan typically includes an amortization schedule showing the reduction in principal through the installment payments over the loan's term. Examples of installment loans include mortgages, auto loans and student loans.
Revolving credit is credit that a borrower can repeatedly use and pay back without having to reapply every time the credit is used. Two common forms of revolving credit are credit cards and lines of credit. There is no set payment plan and you are able to borrow up to your limit. Since this type of loan is riskier for the lender, interest rates are typically higher for revolving credit than installment credit.
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Payment History.
Your payment history, which is a big portion of your credit report, is a crucial element of your credit score. It also helps determine if you can (or can't) get approved for loans at a decent interest rate. This history includes a listing of all your different accounts and their payment status - specifically if you've been current with all your payments. Your payment history accounts for 35% of your FICO® Score.
See how others are staying aware of what's going on with their credit by visiting the myFICO forum .
Rob is a writer... of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one's journey toward financial well-being. His goal is simple: The more people he can help, the better.