Understanding Credit

The word “credit” has several meanings:

• Credit is the ability to borrow money and pay it back over time per an agreement that includes when payments will be due and how much you will pay for interest and fees
• Credit also refers to a person’s history of borrowing and repaying money on time, which is expressed in credit scores and credit reports
• Credit scores and information from credit reports are used to predict future financial responsibility based on a past history of repaying debt
• Having strong credit is a key factor in being able to access loans, employment, rentals, insurance, and other things you may need at a reasonable cost

How can credit help you get a credit card or rent a place to live?

Credit scores and reports are used to predict the likelihood that a person will make payments on time based on their past history of repaying debt. As such, they are used by businesses to make decisions about us in the following ways:

• Banks and credit unions use credit information when approving applications for loans and credit cards
• Landlords use it to choose new tenants (since they want people who pay their rent on time)
• Companies may require a deposit to turn on new water, electricity, wifi, phone, and other services if your credit rating is low or if you don’t have any credit history

Yes! Credit information is used with other types of information to make many kinds of business decisions about us, including:

What do you mean by “strong credit”?

In the world of personal finance, “good” credit usually means you have a credit score of 670 or higher, and “bad” or “poor” credit score is somewhere below 600. This good/bad dichotomy can cause feelings of shame about something we may not have much control over, and who wants to feel bad about that?

At SlugCents, we want you to think of your credit in positive terms that help you see credit for what it is – an important tool – instead of a source of blame, shame, and guilt. Here’s how we want to redefine credit in terms of strength and potential:

What is a Credit Score? A credit score is a three-digit number, typically between 300 and 850, that is used to predict how likely you are to pay back a loan on time. Like with college grades, the higher your score, the better your credit, and a high credit score can make it easier to get credit applications approved and pay less interest on money you borrow.

Credit scores are calculated by scoring models using information in your credit reports, including:

• History of on-time payments (paid by the due date)
• How much you owe/current unpaid debt
• How much available credit you are using on credit cards
• Number and type of loan accounts (e.g. auto loan, credit card, student loan, etc.)
• Credit history, or how long accounts have been open
• New credit applications (also known as “inquiries”)
• If you have a collection account for unpaid debt, a foreclosure, or a bankruptcy

How to build and maintain strong credit:

• Make loan and credit card payments on time: Pay at least the minimum payment (or more, if possible) before or on the payment due date, or call your creditor for help if you cannot pay your bill.
• Keep credit card balances low: Using a high percentage of your credit limits can hurt your score—stay below 30 % if possible.
• Keep older credit accounts open and active: A longer record of responsible use helps your score.
• Don’t apply for credit you don’t need: Lots of applications in a short time can signal financial stress.
• Check credit reports for errors: Dispute inaccuracies and monitor for suspicious activity.
• Use tools to build credit: Secured cards or credit‑builder loans can help establish credit.

A credit card allows you to borrow money – up to a maximum amount, called a credit limit – to pay for things. When you apply and are approved for a credit card, you are given a credit account with a credit limit, which is the maximum amount you can borrow at any time. You will also receive a plastic card that allows you to access and borrow money from your credit account. The card includes a unique account number that can be used to buy from online stores, and a chip that provides security for your online transactions.

Each month, your creditor (the bank or credit union provider of the credit card) creates a statement with details about:

• A list of amounts paid with the credit card and where money was spent (also called credit card charges or credit card transactions)
• Minimum monthly payment – the smallest amount you are allowed to pay to keep your credit card account in good standing
• Payment due date – the date your payment must be made to avoid a late fee
• Interest charges on amounts you borrowed
• Fees, which may include annual fees, late fees, balance‑transfer fees, cash‑advance fees, and foreign‑transaction fees depending on the card you have

Understanding Credit‑Card Interest (APR): The Annual Percentage Rate (APR) is the yearly cost of borrowing on a credit card. You’re usually charged interest only if you do not pay off the balance of your account by the payment due date.

Fixed vs. Variable APR: Fixed‑interest rate cards consistently maintain the same interest rate; variable‑interest rate cards have interest rates that can increase or decrease depending upon market conditions.

Protections: Under the Fair Credit Billing Act, your liability for unauthorized charges is limited to $50 as long as you report them within 45 days of receiving the statement where the charges first appeared(most issuers waive even that). Report lost or stolen cards immediately and dispute billing errors or fraud in writing.

For more information about credit and protecting your credit reputation, visit the Federal Trade Commission’s Understanding Your Credit page.

Credit Counseling: Credit counseling organizations employ certified credit counselors that offer free advice and low or no-cost services, including:

• Advising you on managing money and debts
• Helping you develop a budget
• Helping you order and analyze your credit reports
• Offering free educational materials and workshops
• Organizing a debt‑management plan (DMP) to pay down your debts (this service may have a cost)

A Debt‑Management Plan (DMP) can lower your monthly payments and interest rates, helping you pay debts over a longer time without increasing what you owe. With a DMP, you give your permission to your credit counselor to contact your creditors on your behalf. The credit counselor then reaches out to your creditors to request modifications to your debt, such as an interest rate reduction, waiver of past late charges, or “re-age” of your past-due loan, which means re-setting your next payment due date to the future. When modifications are complete, you make one payment to the counseling organization each month, and they pay your creditors for you until your debt is paid off.

Finding a Credit Counselor: Services are offered in person, by phone, or online. Start with the Financial Counseling Association of America (FCAA), the National Foundation for Credit Counseling (NFCC), or the U.S. DOJ list of approved agencies. Check each organization with your state Attorney General’s office or local consumer‑protection agency before working with them.

WARNING: A legitimate credit counselor or credit counseling agency acts in your best interest. Use these tips to determine if the person or agency you plant to work with is legitimate:

• The agency should send information about services and fees before asking for personal details.
• You should ask about services offered, how counseling is provided, whether educational materials are free, and all fees (get them in writing).
• You should also ask about counselors’ qualifications and whether staff are paid more if you sign up for certain programs. If staff receive extra money for selling you on services, don’t work with them.
• You should receive a formal written agreement before providing confidential information; read the agreement in full and never sign anything you don’t understand.
• If you sign up for a Debt Management Program (DMP), and before you make any payments to a credit counseling agency, contact your creditors directly to confirm they’ve accepted a proposed DMP.

Debt‑Relief (Debt‑Settlement) Programs: For‑profit companies may promise to renegotiate or settle debts for a fee. These services are risky:

• High fees for their services
• Often instruct you to stop paying creditors, leading to late fees and collections
• Creditors may refuse to work with the settlement company
• You may be sued while payments are withheld
• Unsettled debts keep growing from added fees and interest
• Debt settlement damages credit and can leave you deeper in debt

Red Flags – Avoid any company that:

• Charges fees before settling your debt (illegal in most cases)
• Tells you to stop communicating with creditors
• Guarantees to erase your debt or stop lawsuits/collection calls
• Claims a “new government program” will pay your bills
• Promises debts will be settled for pennies on the dollar

Alternatives to Debt Settlement: Work with a nonprofit credit‑counseling agency on a DMP, or consult a bankruptcy attorney for legal options.

Canceled or forgiven debt may be considered taxable income; see IRS Topic 431.

Special Protections for Servicemembers: The Servicemembers Civil Relief Act (SCRA) can cap pre‑service loan interest at 6 % and protect against foreclosure while on active duty.

Scammers use phone, mail, email, text, social media, and even in‑person tactics, often pretending to be a trusted organization or relative.

Classic Warning Signs of a Scam:

• Someone claims to be from a government agency, bank, or family member and asks for money
• Demands fees or taxes upfront to receive a prize
• Requests money via wire, cryptocurrency, payment app, couriered cash, or prepaid/gift cards
• Asks for direct account access or passwords/PINs
• Pressures you to act immediately
• Creates panic, claiming a relative is in trouble or there’s an emergency

Tips to Protect Yourself:

• Never share account details with anyone who calls you first
• Never pay upfront for promised prizes or job offers
• If it sounds too good to be true, it probably is
• Walk away from high‑pressure tactics that make you feel anxious or scared that you will miss out on something important
• Verify “family emergencies” by calling a known number
• Don’t click links in any emails or text messages – go to the website based on the URL you know and trust
• Register your phone on the National Do Not Call Registry to avoid unwanted phone calls

Suspect fraud? Report it to the FTC at reportfraud.ftc.gov, your state consumer‑protection office, or local law enforcement.