What Do You Know About Credit?

What Do You Know About Credit?

Are you ready to test your credit knowledge? This ten-question multiple-choice quiz will explore some fundamentals of credit, how it works, and its impact. After completing all ten questions, click "What's my grade?" at the end of the quiz to see how you did.

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What is credit?
Buying on credit refers to an agreement to purchase a good or service with the promise to pay it back later. The most common form of buying on credit is with the use of credit cards. Credit relates to your credit score which can increase your likelihood of acquiring loans and higher credit lines.

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What are the different types of credit?
Revolving credit refers to an open-ended credit account that can be used and paid off repeatedly while the account is kept open. Open-ended credit accounts typically include credit cards, personal lines of credit, and home equity lines of credit. Installment credit refers to a loan for a fixed amount of money that gets paid off in monthly payments at a fixed dollar amount. Examples include auto loans, mortgage loans, personal loans, and student loans. Open credit is based on a financial arrangement between a lender and a borrower, which allows the borrower to access credit up to a specific limit. Once the borrower starts making repayments, they can reaccess the money.

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What is a credit score?
A credit score is a number between 300 and 850 that depicts a consumer's creditworthiness. This number is based on a record of the borrower's credit history, including several sources, including banks, credit card companies, collection agencies, and governments.

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What factors go in to a credit score calculation?
The most important factor of your credit score is your payment history, or how you've managed your credit accounts. Close behind is the amounts owed—and more specifically how much of your available credit you're using—on your credit accounts.

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Why is having good credit important?
Having good credit demonstrates your financial fortitude. Usually, scores that are over 700 fall into this category. Good credit scores will help you get approvals for leases, loans, and mortgages with lower interest rates. Low scores can ultimately lead to disapproved applications or high-interest rates, which would directly increase your monthly payments.

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How do I increase my credit score?
Payment history and credit utilization are the two most important factors that affect your credit score the most. Those two factors make up more than half of what your credit score is. Paying bills late by 30 days or more will damage your score, and the later you pay, the more damage it will do. Making larger payments instead of the minimum will help pay your balance down quicker, impacting your overall credit utilization and affecting your score positively. Increasing your credit line will also impact credit utilization because the higher limit will lower your percentage.

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What level of credit balance should I keep to improve my score?
Experts recommend using no more than 30% of your total credit; however, paying off your debt ultimately will increase your credit score the most. Keeping an overall low balance will help your score get to higher levels.

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What can hurt my credit score?
Late payments are one of the top two factors that can dramatically hurt your credit score. The longer it takes to make the payment, the more damage your credit score will incur. Applications for new credit will also negatively affect your score since a lender can see how much risk you are as a borrower. Closing an account will also hurt your score since the longer your account is open, the more it will positively affect your score.

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What do credit scores indicate?
Credit scores allow lenders to see if a borrower is at risk of not repaying a loan. The higher the score, the lower the risk you represent to the lender, making it more likely that the lender will approve a loan and offer a lower interest rate. The lower a score is, the more likely your loan will be disapproved or approved at a higher interest rate.

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Who collects the information that your credit score is based on?
Experian, Equifax, and TransUnion all provide the information used to calculate credit scores in the form of a credit report. None of these credit bureaus calculate the score itself; the calculation is more complicated and is taken care of by companies like FICO and VantageScore.

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