Credit 101

What even is credit?

Good question. To put it simply, credit is when you borrow money to pay for something and promise to pay it back over time. When lenders—think credit card companies, banks, car dealerships, etc.—check your credit, they’re trying to decide if you’ll make good on that promise.

Good credit shows lenders that you’re responsible with your money and pay back what you borrow. Over time, this gives you more purchasing power. The better your credit, the bigger the amount of money a lender might trust you with.

Bad credit does just the opposite. It’s harder to secure a loan or even rent an apartment if your credit gives the impression that you haven’t paid back what you’ve borrowed. This can even impact things like how much you pay for car or home insurance.

What’s a credit score?

Most lenders rely on a credit score to determine whether your credit is good or bad. The most common scoring model, the FICO®, gives you a score between 300 and 850, with 300 being a really crappy credit score and 850 being almost impossibly good.

There are a lot of things that go into determining your credit score, including:

• Loan payment history
• The overall amount of debt you owe
• The length of your credit history (Young folks are at a disadvantage here. Boo.)
• New credit and recent changes
• Types of credit used
• Number of credit cards, loans, etc.

What does my credit score do?

It might seem like just a silly number, but it affects a lot of your financial life.

Lenders and credit card companies use your credit score and other application information to determine whether to give you a loan or a credit card. They also use it to determine your interest rate and credit limit.

While this seemingly random number system may seem unfair, it’s intended to keep things impartial. Credit scoring applies the same formula to everyone, across the board. Factors that might cause bias—anything from age to demographic to where you grew up—aren’t included or considered.

How do I build a good credit score?

No matter where your credit score is now, there’s always room for it to get better! Here are some ways you can build or maintain a good credit score:

• Use the Andi app to keep an eye on your credit score
• Pay bills and loan payments on time
• Don’t take on more debt than you can handle
• Use as little of your credit as possible (think 20% or less of your income)
• Pay more than the minimum payment
• Keep an eye on your credit score
• Don’t take out too many credit cards (yes, even Andi credit cards)

Pro-Tip: You might be feeling on top of the world. Now that you understand credit, you’re ready to get out there, get some credit cards, and spend (wisely) to build that score! Good for you. But don’t go too credit crazy. When you apply for a credit card or a loan, it can affect your score, and not always in a good way. If credit card companies or lenders see that you’ve applied for 27 credit cards in the last two days, they might think you’re… a little desperate. And we don’t want to come off as desperate.

Happy credit journey, pals.