Bottom line up front: Credit is a measure of your ability to pay back debt – also known as your Creditworthiness.

More specifically, ‘Credit’ is a calculation based on your ability to pay back a bank or a credit union (or other institutions) for debt or loans that you borrow.

**Note: This is not Financial advice – just information on what credit is**

If you pull out say, $25,000 from a bank, to go buy a car, the bank drafts up a contract – that you agree to pay back over time. If you pay it back in a timely fashion (for example, within the 5-6 years that they require), then credit bureaus and banks will look at that repayment favorably (this is good).

If, however, you cannot pay back the $25,000 in a timely fashion, banks and credit bureaus will look at that unfavourably (this is bad). Also, missed payments will also act against you.

Again, credit refers to your ability to borrow money or access goods and services with the promise to pay for them later. It’s like a financial trust score that lenders and businesses use to assess your reliability in repaying debts.

Now who are these credit bureaus or other financial institutions?

In the United States, the top three credit bureaus are Equifax, Experian, and TransUnion. Each of these bureaus collects and maintains credit information on millions of consumers, which is used by lenders, businesses, and individuals to assess creditworthiness (how much they can trust you to pay them back).

Equifax uses a credit scoring model known as the Equifax Credit Score, which ranges from 280 to 850. A higher score indicates better creditworthiness, while a lower score suggests higher risk.

Equifax evaluates creditworthiness based on several factors, including payment history, amounts owed, length of credit history, types of credit in use, and new credit accounts. Payment history and amounts owed (aka how much debt you carry) typically carry the most significant weight in determining a consumer’s credit score.

Experian also utilizes a credit scoring model ranging from 300 to 850, known as the Experian Credit Score. Similar to Equifax, higher scores indicate lower credit risk, while lower scores suggest higher risk. Experian assesses creditworthiness by considering factors such as payment history, credit utilization ratio (the percentage of available credit being used), length of credit history, types of credit accounts, and recent credit inquiries.

Payment history and credit utilization are among the most influential factors in determining a consumer’s credit score.

TransUnion employs the TransUnion Credit Score, which also ranges from 300 to 850. As with Equifax and Experian, higher scores signify lower credit risk, while lower scores indicate higher risk. TransUnion evaluates creditworthiness by analyzing similar factors to Equifax and Experian, including payment history, credit utilization, length of credit history, types of credit accounts, and recent credit inquiries.

Similar to Experian, Payment history and credit utilization are critical factors in determining a consumer’s TransUnion credit score. Are you seeing the trend here?

Overall, all three credit bureaus utilize similar rating scales and evaluate creditworthiness based on factors such as payment history, credit utilization, length of credit history, types of credit accounts, and recent credit activity.

Now, how do you increase your credit score?

• 1. Utilizing credit cards – in a smart fashion. Open a credit card – use it for ROUTINE spending only. Credit cards should not be used to buy things that you cannot afford in cash. This is where most Americans fail – they over extend themselves and keep a balance on their credit cards. This is BAD. Always (and I do mean always) pay your balance in full.
• 2. Finance large purchases – but do so with care. If you can afford a car in cash, or afford furniture or a home in cash, that’s good. But if you can pull out a loan at an affordable Annual Percentage rate (usually below 5%) – and you have an investment plan (say investing in a large, diversified fund – VOO by Vanguard for example) – you can earn a PROFIT on the difference between your debt and your average expected investment return. This technique will help you build credit and keep you from having to drop all of your cash on one purchase.
• 3. Increase your credit limit on credit cards that you already have open and that you use responsibly. (Most credit institutions will give you a higher limit if you’ve already shown an ability to pay off your credit cards in a timely fashion. How does this help? It shows the credit bureaus that you have access to more debt, but that you also have the restraint to NOT spend up to that new limit.)

In summary: Credit in the U.S. can be an excellent tool – it can help you buy and enjoy necessities now. Such as a house for example (as it’s pretty tough for most people to save over $100,000+ to then throw it at a home). Take all of this information at surface level – do your own research on the WHY and HOW to use credit, and meet YOUR personal finance needs.

As always,

-Michael, with military.cash