Understanding Your Credit

Credit is the borrowing of money with the intention of repaying the lender at some later point in time. Examples of credit include: credit cards, home mortgages, student loans, and car loans.

There are 3 primary agencies that compile information on an individual’s credit history and produces a report which lenders use to help determine whether or not to approve a request for credit. These 3 main credit reporting agencies are: Experian, Equifax, and TransUnion.

A credit report includes an individual’s name, address, social security number, current employer and employment history, and previous credit history. A person’s credit history includes various types of accounts (ie. bank accounts, credit card accounts, student loans), the respective balances remaining, the payment status (ie. whether or not payments were made on time), and any collection information. A person’s credit report contains information on that person’s credit history going back 7-10 years.

A credit report will also identify how often, when, and by whom an inquiry was made into the individual’s credit. This is valuable information to lenders as it shows them how frequently a person is applying for additional credit. And a credit report will identify any legal actions taken against an individual for the purposes of reclaiming money owed.

In instances where a person’s credit history is lacking, lenders may take other proof of credit into account, such as rental payment receipts and utility bills. It is difficult to obtain credit without proof of some sort of existing credit history, however short or small.

When a consumer applies for a loan or other form of credit, the lender will contact one of these credit bureaus to review the applicant’s credit report. Although most of the information collected by each of the agencies is the same, slight differences may exist in an individual’s credit report from each agency. In addition, errors will often exist on credit reports.

Different lenders will pull different agency’s credit reports on their applicants, making it essential for every consumer to make sure all 3 of their credit reports are accurate. Fortunately, every American is entitled to receive one free copy of their own credit report per year from each credit reporting agency. But even if you’ve already received your free credit report from each agency for a given year, you can still purchase an additional copy at any point in time you like for a small fee.

By staying aware of the information contained in your credit reports, you can take decisive action to fix any problem areas (whether a mistake on the report or negligence on your own part), and start planning for ways to improve your existing creditworthiness.

In addition to your credit report, every individual also has a credit score (or, in truth, multiple credit scores as different agencies calculate the score slightly differently). The concept of a credit score - a number between 200 and 900 that compares every American’s creditworthiness on the same scale - was pioneered by Fair Issac’s Corporation. The higher one’s credit score, the less of a credit risk he or she is perceived to be, the more likely to be approved for further credit, and the lower the interest rate offered.

A person’s credit scores is calculated based on the following 5 items:

    * total amount of money owed;

    * payment history;

    * duration of person’s credit history;

    * forms of active credit;

    * how recently new credit was given to them