Making Borrowing Decisions

Credit comes from the Latin verb credere, which means "to believe." In finance, it refers to the ability to borrow money now and repay it later. There are two main types of credit:

Revolving Credit

Credit is where you can borrow up to a specified maximum amount and repay what you borrow as you use it. Examples of revolving credit include credit cards and lines of credit.

Installment Credit

A loan is where you receive the money you borrow in a single lump sum and then repay it in pre-determined monthly installments. Examples of installment credit include car loans, mortgages, and student loans.

Credit Bureaus

Credit bureaus collect information about your credit history and create credit reports. This information includes your credit accounts, payment history, and credit inquiries. Lenders use credit reports to assess your creditworthiness, which determines how likely you are to repay a loan.

The three major credit bureaus in the United States are Equifax, Experian, and TransUnion. By law, you can receive a free credit report from each of these bureaus once per year.

AnnualCreditReport.com  is the only website authorized by the federal government to issue free annual credit reports.

Credit Reports

It is important to check your credit reports regularly to ensure accurate information. If you find any errors, you should dispute them with the credit bureaus. You can also use your credit reports to track your credit score, which is a number that lenders use to assess your creditworthiness.

Here are some tips for using your free credit reports wisely:

• Request a report from each of the three credit bureaus every four months. This will allow you to see how your credit report looks from different perspectives.
  
  
• Review your credit reports carefully for any errors. If you find any errors, dispute them with the credit bureaus immediately.
  
  
• Track your credit score over time to see how it is changing. This will help you identify areas where you need to improve your credit.

What Information Is On Your Credit Report?

• Report number, date, and name
• Identifying information (name, birth date, SSN, etc.)
• Bill payment history
• Loans
• Current debt
• Bankruptcy history
• Lawsuit records

In most cases, your credit report will not include your credit score.

Who Uses Credit Reports and Why?

Credit bureaus can sell the information on your credit report to:

• Lenders
• Potential employers
• Insurance companies
• Rental property owners

These businesses may use the information on your credit report to decide if you qualify for credit, loans, rental property leases, employment, and insurance.

Credit Scores

A credit score is a number that lenders use to assess your creditworthiness, determining how likely you are to repay a loan. Credit scores are based on information in your credit report, which includes your credit accounts, your payment history, and your credit inquiries.

Types of Credit Scores

There are two main types of credit scores: FICO scores and VantageScores. FICO and VantageScore create credit scores using information from your credit reports.

Lenders use FICO scores more widely than VantageScores. However, FICO scores and VantageScores are important factors in determining your creditworthiness.

Both FICO scores and VantageScores use similar factors to calculate your credit score:

Main Factors in a FICO Score

Main Factors in a Vantage Score

Interpreting Credit Scores

Both FICO scores and Vantage Scores range from 300 to 850, and each divides the ranges into five categories. A higher credit score means that you are a lower-risk borrower.

Your Credit Score

There are four main ways to obtain your credit score:

1. Check your credit or loan statements.
   
   
2. Talk to a credit or housing counselor.
   
   
3. Use a credit score service (e.g., Credit Karma).
   
   
4. Buy your score from one of the three major credit reporting agencies: Equifax, Experian, or TransUnion.

How Your Credit Score Impacts Your Financial Future

Each individual has their own credit score - this includes you! Lenders use it to decide whether you get a mortgage, a credit card (or some other line of credit), and the interest rate you are charged for this credit.

The score provides a picture of you as a credit risk to the lender at the time of your application.

• A lower score implies a riskier borrower.
  
  
• A higher score implies a less risky borrower.

Your credit score is a reflection of your credit risk to lenders. The lower your score, the riskier you appear to be, and the less likely you are to get credit; or, if you are approved, you will pay more to borrow money. Lenders will look into your credit history in more detail if you are trying to borrow money. They could deny your application or offer higher interest rates if you have had a previous negative remark, such as a foreclosure, or if you owe a debt to collection agencies.

Ways to Improve Your Credit Score

Here are some ways to improve your credit score:

Have a long credit history.

Pay your bills on time.

Keep your debt low.

Reduce debt.

Review your credit report.