Understanding Credit: the Good, the Bad, and the Ugly

Knowing how to manage your credit is an essential part of personal finance.



Credit is an integral part of everyone's finances, whether we like it or not. Everyone has some kind of credit history, and understanding how to establish and manage your credit is important, even if you don’t plan to borrow money. Your credit report is used not only to determine whether you can qualify for a car loan or a home loan but also to determine if you can rent an apartment or if you should be considered for a new job. Your credit is a reflection on whether you are reliable and pay your bills, and understanding how credit works and how to manage your credit score should be considered a basic survival skill.


This guide will help you understand the ins and outs of credit, how to build it, how to maintain it, and the consequences when you don’t.

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Chapter 1

Establishing Credit—How to Get Started

Before you can manage your credit, you need to establish a credit history. The catch-22 of credit is that in order to borrow money, you need a credit history, but you can’t establish a credit history without borrowing money. There are some easy ways to get started establishing and building your credit, but first let’s review what we mean by credit and how your credit score is used to measure your creditworthiness.

Credit is defined as the trust that a lender or financial institution is willing to extend to you based on past performance or your credit history. Lenders determine if they should give you a loan or a credit card or should lend you money based on your creditworthiness. They determine your creditworthiness by reviewing your credit score, which is a reflection of various factors, such as how you have managed your bills and payments in the past and your ability to repay whatever money you borrow.


Your credit score is a number between 300 and 850 and is the foundation of your credit. Scores in the range of 670-739 are considered good credit; if you have a credit score of 580-669, you may have trouble borrowing at favorable interest rates. Your credit score is monitored by three credit bureaus—Equifax, Experian, and TransUnion—and is based on your FICO score.

FICO credit scores were created by Fair Isaac Corporation in the 1950s. Your FICO score uses predictive analytics based on information gathered about your financial life, including your payment history, what you currently owe, the length of your credit history, the mix of credit you currently have, and new credit accounts. The three credit bureaus use your FICO score as the basis for their individual credit score ratings; however, the score for each credit bureau will differ based on the other information they have available.

Your credit score follows you throughout your life, and it changes depending on your financial habits. For example, if you are consistently late in paying your bills, it will reflect badly on your credit score. Similarly, if you have too many credit cards or take out too much credit at one time, it can have an adverse effect on your credit score. However, if you manage your credit wisely, you can maintain a better credit score, which makes it easier to borrow money.

Note that your credit score is used for things other than borrowing money. Landlords will review your credit score before they let you sign a lease on an apartment or rental home. Car dealers won’t let you sign an auto lease or receive an auto loan if you have poor credit. Even employers use your credit score as a way to assess whether you will be a responsible worker.

If you are just starting to build your credit history, it pays to start off on the right foot and establish a good credit score. If you have established credit, there are strategies you can use to improve your credit. One way to start is with the FICO Score Estimator.  FICO scores are available inside our Digital Branch (online banking) for iQ members too, which is updated monthly. iQ Credit Union also includes instruction on credit as part of our financial education program.

Chapter 2

Home Loan Basics

Once you understand the basics of credit, you can take the steps necessary to build and maintain a good credit score. Even if you have never applied for credit before, you probably still have a credit score. If you have made rent payments or utility payments, or have fallen behind in paying your bills, then your payment activity may have been reported to the credit bureaus. That is why it pays to monitor your credit score and periodically request a credit report from one of the credit bureaus to look for errors.

There are a variety of ways to keep track of your credit score. You can register with Credit Karma, Mint, WalletHub, or any of the dozens of other online services that provide free credit information. You also can use the personal FICO scores that iQ Credit Union provides to all its members as part of online banking. Whatever tool you use, you want to check on your credit score periodically to look for changes and to determine what factors are affecting your credit.

If you are looking for ways to build your credit, there are easy ways to do it.

The simplest way is to start with credit cards. A credit card gives you revolving credit, which is credit that is automatically renewed as you pay it off. Your credit card will have a credit limit, which is the maximum amount of credit you have available. The amount of credit available at any time is your credit limit minus the amount you owe on your credit card.

When using credit cards, what will hurt your credit score is carrying too much credit card debt for your income or carrying too many types of credit cards—such as multiple Visa, Mastercard, store cards, gas cards, and so on. If you are late with your credit card payments, or if you continue to make the minimum payment rather than reducing your credit card debt, it also will have a negative impact on your credit score. If you are establishing credit, it is a good idea to use your credit card for some purchases and then pay off what you owe each month so you aren’t carrying credit card debt.

Another reason to monitor your credit score and credit card activity is to watch for fraud and identity theft. The number of reported cases of identity theft doubled from 2019 to 2020, according to the Federal Trade Commission. But you can avoid becoming a victim. 

Be cautious about how you use your credit cards and where you share personal information, especially when shopping online. Also beware of online offers and email phishing messages seeking to trick you into surrendering personal and credit information. Use care and common sense and check your credit reports regularly for unusual activity or new accounts you didn’t authorize, and if your identity is stolen, immediately put a freeze on your credit with each of the credit reporting bureaus so no one can use your identity to open new credit accounts.

If you have trouble qualifying for a credit card or getting your establishing your credit, there are other ways to get started:

Cosign on a credit card. 

You can share someone else’s credit by getting them to cosign on a credit card for you. That means your cosigner is using their credit to guarantee payment, so be sure to manage your payments carefully and avoid pitfalls that could impact your credit score as well as your cosigner’s credit.

Get a cosigner for a personal loan.

You can take out a personal loan using someone with a good credit history as a cosigner. Even a small loan that is easy to repay will help you establish your credit.

Apply for a student loan. 

If you are going to college or in school, it is usually easier to qualify for a student loan than it is to qualify for other types of credit. Many people start establishing a credit history by repaying student loans.  

Get a secured credit card. 

If you don’t qualify for a regular credit card, consider getting a secured or prepaid credit card. With a secured card, you use a cash deposit that serves as your credit limit, and you use the card to draw against the deposit, making regular payments just as you would with any other credit card.

Remember that the criteria used to determine your credit score is based on paying your bills on time and managing your debt, so as you start building your credit, make timely payments and be sure you don’t take on more debt than you can handle.

Chapter 3

Managing Your Credit and Carrying Your Debt

Once you start to establish your credit, you will find that there are times when having a good credit score can be very helpful. Chances are that you will need to borrow money at some point to finance a car purchase, buy a home, or pay an unexpected expense. Having good credit makes it easier to get the best loan you need, and it can help you get better loan rates because a higher credit score shows you are a good credit risk.

Borrowing to fund certain expenses or life events is quite common, even expected. Student loans, for example, have become commonplace for paying college tuition, and buying a home requires a home loan. There are times in your life when having good credit really counts:

Getting a Credit Card 

With good credit, you can qualify for different types of credit cards, including cards that have low interest rates and that offer reward points, airline miles, and even cash back. The better your credit, the higher your credit card spending limit and the better your credit terms. iQ Credit Union offers different credit cards to meet every credit need, including a Visa Platinum card, a Visa Platinum Rewards card that offers 1% cash back on all purchases, and a Visa Signature Rewards card that provides one point for every dollar with extra points awarded for dining and travel.

Applying for a Home Loan 

When you are ready to buy your first home, you are going to have to prove your creditworthiness in advance and show you can qualify for a mortgage before you will be considered a serious buyer. The first step for anyone shopping for a new home is to be prequalified for a home loan. By working with your bank, credit union, or mortgage broker, you can determine the size of your mortgage and what you can afford to pay for a home based on your credit and your income. The better your credit, the more you can afford and the better the terms you can negotiate on your home loan.

Taking Out a Car Loan 

Very few people pay cash for a car, especially if they are just starting out, so you will have to take out a car loan. Even if you decide to lease a car instead of buying one, you still need to qualify for the lease, just as you would have to qualify for an auto loan. The better your credit, the easier it will be to negotiate a loan that suits your budget.

Qualifying for a Personal Loan 

Sometimes you need extra cash for something unexpected, such as medical bills or an unexpected trip. In these cases, a personal loan might come in handy. With a personal loan, you are borrowing money solely on your good credit. Your credit score and credit history are the only indicators to the lender that you will repay the loan.

Navigating Debt

In addition to managing your credit so you can borrow money, you also have to manage your debt so you don’t get into financial trouble. If you don’t keep an eye on your spending and your debt, it is easy to become overextended with credit card payments or loan payments that take too much out of your household budget. If you do start to accumulate too much debt, there are steps you can take to get your debt back under control.

Debt consolidation is a common strategy. When you consolidate your debt, the idea is to reorganize your debt, taking credit cards, loans, and other outstanding debt with high interest rates and paying it off with a new loan or credit card at a lower interest rate. The concept is that by restructuring your debt at a lower interest rate, you will pay less money in the long run, and you can make the monthly payments more manageable.

One of the factors that affects your credit score is using too much of your available credit. This is defined as your debt-to-income (DTI) ratio: the difference between what you owe each month versus what you earn. If your DTI is too high, it is an indication that you are carrying too much debt and may have trouble repaying what you own.

However, you can carry a healthy amount of debt to show you are a responsible borrower. Financial experts recommend applying the 28/36 rule when budgeting for debt. The 28/36 rule says to spend no more than 28% of your total income on housing expenses, such as your mortgage, and no more than 36% of your monthly income on total debt, including housing, car loans, and credit cards. If you find that you owe between 43-50% of your monthly income in debt, it is time to take action to reduce your DTI.

Student loan debt presents a unique problem for many borrowers. Student loans are the second-biggest form of personal debt after mortgages, and 75% of students who took out loans did so to attend two- and four-year colleges. At the beginning of 2021, the average student loan debt for graduates of the class of 2019 was calculated to be almost $30,000 per student. To manage student loans as part of your overall debt, consider applying the 50/3o/20 rule developed by Senator Elizabeth Warren, which says to allocate 50% of your income for needs, 30% for wants, and 20% for savings. Student loans and other debt falls in the needs category, along with housing, food, utilities, and other essentials.

It also pays to plan for the unexpected. Research shows that only 39% of Americans have enough money set aside to pay for a $1,000 emergency. Even with an emergency fund that could cover three or even six months of household expenses, a major emergency such as a trip to the hospital can trigger financial disaster. The average three-day hospital stay costs $30,000. Having good credit can help you borrow money or arrange payments for healthcare. You also might consider opening a tax-advantaged Health Savings Account (HSA) to save money for medical expenses that aren’t covered by health insurance.

A financial tool that many people use so they have extra cash when they need it is a personal line of credit or home equity line of credit (HELOC). A line of credit is a form of revolving credit: Your bank or credit union extends an amount of money that you can tap when you need it and pay back over time, with interest, much like a credit card. A HELOC often gives you a larger amount of credit than a personal line of credit because the lender is using the equity in your home to guarantee the loan.

Chapter 4

iQ Credit Union and Your Credit

It is not uncommon to need help managing your credit and your debt. That’s when you can count on iQ Credit Union to step in and lend a hand.

iQ is committed to helping members reach their financial goals. As part of that commitment, iQ offers credit cards, home loans, auto loans, personal loans, HELOCs, and more to help members build their credit and manage their debt.

iQ also has extensive financial education programs for students and adults that offer tips, tools, and techniques to show you how to manage your credit and your debt, and we offer insights and advice on our blog.

The financial professionals at iQ are always available to help members with advice and solutions, such as refinancing and debt consolidation.

Get the help you need when you need it from iQ.

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