How Credit Works

Credit affects so many aspects of our lives, it’s hard to imagine living without it — and it can be very difficult to achieve your financial goals if you don’t have it. Good credit allows you to qualify for credit cards as well as for loans for many things including homes, cars, and college. Your credit standing may also weigh heavily in the scale when you’re being considered for a new job or when you’re being approved for a home or apartment lease. It can also be a consideration in lowering your insurance rates. It is clear that having good credit can make our lives much easier.

How does credit work?

Credit, in its simplest definition, is a track record of whether you pay your bills on time or have a less than perfect payment history. It is important to establish and maintain a positive credit record to achieve a good credit score. When you apply for any kind of credit, potential lenders base their decision on whether to approve or deny your application on your credit score. The higher your credit score, the better your chance to obtain the loan.

How are credit reports compiled?

Information about your credit payment history is compiled by the three credit reporting bureaus — Experian, TransUnion, and Equifax — and are based on payment information they receive from your credit card companies and other lenders. Each of your creditors sends a report about you to the credit bureaus. These reports include positive information, such as making your payments on time and not using your entire credit line, as well as any negative information such as late or skipped payments, foreclosures, liens, etc.

Each credit bureau uses all of the information it has compiled to create your personal credit report. This report is available to lenders who are considering you for a loan or credit card. Bear in mind, the three credit agencies work independently, so your credit reports will be different from each one.

Your credit score

Each person’s overall credit score is determined when all of the information included in your credit report is collectively put through a financial matrix. The resulting score is that all-important number lenders look at when you apply for any kind of credit, and the higher the credit score, the better your chances of being approved for a loan.