You’ve probably heard the terms “good credit,” “bad credit,” and “credit score” before, but what does that mean for you now that you are an adult?

A credit rating measures your likelihood of repaying a debt. Banks, credit card companies, and other lenders use your credit rating to determine whether they want to do business with you (for example, by loaning you money, letting you open a bank account, or issuing you a credit card) and what terms they are willing to give you. They want to understand how risky it is for them to let you use borrowed money to make payments, and whether they can expect that money to be repaid.

How do I establish good credit?

Your credit score can have a major impact on your financial future by determining what amounts of financing you qualify for and on what terms (for example, if you have good credit you may be on the hook for lower interest payments than if you have bad credit). Because of this, it is important to understand how to establish good credit.

The most common factors that impact your credit score are as follows:

• Payment history – Do you make on-time payments, or do you miss your payment deadlines? Your history of timely or untimely payments impacts your credit score.
• Credit usage – How much credit do you have and how much are you using? As a simple example, if you have one credit card with a $10,000 limit and you currently owe $5,000 that you haven’t paid off, your usage rate is 50%.
• Length of credit history – Your length of credit history is determined by the average age of your credit accounts, as well as the age of your oldest accounts and your newest accounts. This can be tricky, because canceling an older credit card or paying off an older account can potentially hurt your credit score.
• Types of accounts – Installment accounts require regular payments and are then paid off at the end of a term (think a mortgage or a car loan), while revolving accounts allow you to take out additional financing on a regular basis (think credit cards). Having both types of accounts is a positive factor in determining your credit score.
• Recent activity – Have you recently applied for a loan or a new credit card? The general guidance when trying to make a big purchase (like a home) using financing is to avoid any recent credit checks, so don’t go buy a new car right before you try to buy a house!

The following actions, among other things, can help you build up a good credit score over time:

• Establish and maintain bank accounts;
• Maintain steady employment;
• Borrow and timely pay back loans, credit cards, etc. (you can’t build up your credit score without having credit, and debit cards don’t count!);
• Pay your bills on time;
• Keep your credit usage below 30%;
• Keep credit accounts open (especially accounts like credit cards that do not have an annual fee);
• Don’t make/cause lots of “inquiries” and/or space out your credit applications; 
• Become an authorized user on a family member’s or friend’s credit card account; and
• Monitor your credit reports regularly to ensure there is no incorrect information.

How do I repair my credit?

If you have something negative turn up on your credit report, first things first—if it is inaccurate, you should file a dispute with the applicable consumer reporting agency! If the negative item is accurate, it may take some time to build back up your credit score. You should take the actions described above, and you should also be aware that you might need to wait it out for some time before the negative item is removed from your credit report. Generally, bad credit information is removed after seven years, but certain things like bankruptcies can remain on your credit report for 10 years or more.

What is considered a strong credit score?

According to Equifax, generally credit scores from 580 to 669 are considered fair, 670 to 739 are considered good, 740 to 799 are considered very good, and 800 and up are considered excellent. Different lenders might understand these scores differently, but this gives you a general sense of what these scores mean. As the score goes up, the assumed risk goes down and you might be able to borrow money at a lower interest rate and pay far less in the long run.

DID YOU KNOW: The Fair Credit Reporting Act guarantees you access to a free credit report once a year from various consumer reporting agencies. These include Experian, TransUnion, and Equifax.

Buying on credit

It is generally advisable not to use credit unnecessarily for small purchases unless you will be able to pay those amounts back very quickly; having high credit usage or failing to make on-time payments can negatively impact your credit score. However, sometimes it is necessary to pay for big-ticket, expensive, or unexpected items (like a house, car, college, or medical expenses) with a loan or other credit that you may need to pay back over time.

Collateral – For certain purchases, you may be required to provide rights to some of your property to receive a loan, and the lender will have a right to repossess that property if you do not repay the loan; this is called collateral. One common example is a mortgage—when the lender gives you the money to buy a home, the home itself serves as collateral to “secure” the loan. If you are unable to repay your mortgage, the lender could foreclose on your home and sell it to make up for the money you borrowed and didn’t pay back.

Always Read the Agreement – Always check the terms of your loan or other credit agreement to confirm whether there are penalties if you pay off the loan early. If there is an interest rate you should understand whether it is fixed (and won’t change) or variable/adjustable (your rate might go up!).

Collections

If you find yourself unable to repay a loan or financing, you may face collections, but there are laws in place to protect debtors. Under, the Fair Debt Collection Practices Act, collections cannot take certain actions, including the following:

• Debt collectors cannot harass or embarrass you;
• Debt collectors cannot call you at an unusual or inconvenient time or place (for example, while you are sleeping or, in some cases, when you are at work);
• Debt collectors may not use social media to publicly post about a debt you owe; and
• Debt collectors and creditors cannot garnish your wages for consumer items (meaning they can’t take the amount directly out of your paycheck).

Under the Equal Credit Opportunity Act, lenders can’t discriminate against you based on race, color, religion, national origin, sex, including sexual orientation and gender identity, marital status, age, whether all (or part) of your income comes from public assistance, or whether you have in good faith acted on one of your rights under the federal credit laws (for example, if you exercised your right to dispute errors in your credit report.