Credit, credit cards and credit scores

Credit is borrowing now and paying later, usually with interest. The amount borrowed is the principal. The annual percentage rate (APR) is the yearly cost of borrowing. On many loans it also counts certain fees, which makes it the best single number for comparing loan offers; on a credit card it is usually just the interest rate, so compare any annual fee separately. Revolving credit, such as a credit card or line of credit, lets you borrow up to a credit limit, repay and borrow again. Installment credit, such as a car loan, student loan or mortgage, is a fixed amount repaid in equal payments over a set term. A secured loan is backed by collateral that the lender can take if you do not pay, such as the car for a car loan; an unsecured loan, such as most credit cards, has none, so it usually costs more.

A credit card bill shows the statement balance, the minimum payment and the due date. On many cards, paying the full statement balance by the due date during the grace period means no interest on new purchases. A balance that is carried over is charged interest, roughly the APR divided by 12 each month. Paying only the minimum keeps most of the balance growing with interest, so the debt can take years to clear. Late payments can bring fees and hurt a credit score. A debit card spends money already in your checking account; it is not borrowing, so it does not build a credit history.

A credit report lists your accounts, balances, payment history, inquiries and public records such as bankruptcies. In the U.S., you can get free reports from each of the three nationwide credit bureaus at AnnualCreditReport.com. Most negative items can stay on a report for seven years, and a bankruptcy for up to ten. A credit score sums up the report as a number; a base FICO Score runs from 300 to 850. FICO says its scores weigh payment history (35 percent), amounts owed (30 percent), length of credit history (15 percent), new credit (10 percent) and credit mix (10 percent). Credit utilization, your card balances divided by your credit limits, is a large part of amounts owed; a lower share generally helps.

A higher score usually means lower interest rates and easier approval, and some landlords, insurers and employers check credit too. Checking your own report or score is a soft inquiry and does not affect your score; applying for new credit causes a hard inquiry, which can lower it a little for a time. To protect your credit, check your reports for errors, dispute anything wrong with the bureau, and if your identity is stolen, place a fraud alert or a credit freeze, which stops new accounts from being opened in your name.

For a card-interest question, turn the APR into a monthly rate by dividing by 12, then multiply by the balance that is carried over. Say which balance you used.

To explain a change in a credit score, name the factor that moved (payment history, amounts owed, length of history, new credit or mix) and say which way it pushes the score.