12.4 Credit and Credit Scores

Notes

Credit is borrowing money now with a promise to repay later, usually with interest.

• Secured loans are backed by collateral (a car loan or mortgage). Unsecured credit, such as most credit cards, has no collateral and often a higher rate.
• The APR (annual percentage rate) is the yearly cost of credit. On a credit card, the monthly rate is about $\displaystyle \frac{APR}{12}$.
• Worked example: a $1,200 balance at $18\%$ APR is charged about $\displaystyle \frac{18\%}{12} = 1.5\%$ per month, or $0.015 \times 1{,}200 = 18$ dollars of interest for one month.
• Paying only the minimum payment makes debt last much longer and cost much more. Paying the full balance each month avoids interest charges on purchases.
• A credit report records your borrowing history; the three main credit bureaus are Equifax, Experian and TransUnion. A credit score (FICO scores range from 300 to 850) summarizes how risky you are as a borrower.

• Credit utilization is balance divided by credit limit. A $900 balance on a $3,000 limit is $30\%$ utilization; lower is better.
• A good score can mean lower interest rates on loans and easier approval for apartments.