You need good credit, but what is credit? In order to improve your credit you need to know how credit works, what hurts it, and how you can manage it. Let’s look at what credit is, how it works, and where to find out more about it.
What is Credit?
Credit is your reputation as a borrower. It tells others how likely you are to repay your loans. Credit is made up from information about your borrowing history. Most of the information comes from your credit reports.
What is a Credit Report?
A credit report contains information about your borrowing history. Lenders (and others) provide information that ends up on credit reports. They report how much you’ve borrowed, how you’ve repaid, and other details about your borrowing behavior.
What is a Credit Bureau?
Credit reporting agencies collect - and then distribute - all of this information about you. They are information warehouses, and if they have erroneous information your credit can suffer.
What is Credit Scoring?
Credit bureaus have a ton of information. There are hundreds or thousands of lines of information about you in their database, and it’s difficult for lenders to sort through all of it. As a result, most companies use credit scores instead of reading through everything in your credit reports.
Credit scores are numbers generated by a computer program that runs through your credit reports. It looks for patterns, characteristics, and red flags in your history. Based on what the program finds, it spits out a credit score.
What is Credit Used For?
Credit was originally used for lending decisions. Nowadays, credit scores and reports are used in other areas of your life. Consumers and lawmakers constantly watch what credit is used for, and figuring out if it’s fair or not.
In addition to lending decisions, credit is used for insurance and employment approvals.