Credit Scores

There are three major consumer credit reporting bureaus Equifax, Experian and TransUnion. The credit bureaus provide an important financial service for lenders and consumers by collecting and reporting consumer credit information. Lenders, credit card companies, insurers, landlords and utility companies all use the information provided by these agencies to make decisions about your creditworthiness as a borrower or customer.

The three major credit bureaus are separate agencies, and work independently of one another, each using their own systems to calculate three separate credit scores which may differ from one another. When reporting information to the credit bureaus, lenders must report to each one of the credit bureaus separately. Therefore, each credit bureau may have different information.

The credit bureaus keep an invisible paper trail of all of your account activity when it comes to credit and loans. When you make a payment on your credit card, or open a new account, this information is reported to the credit bureaus and added to your credit report.

In addition to collecting information, the credit bureaus distribute information as well. When you apply for a mortgage or an auto loan, for example, the lender will contact one or more of the three credit bureaus to inquire about your credit history before making a decision. This inquiry, too, becomes part of your credit report, and is known as a "hard inquiry." "Hard inquiries" are inquiries that come from a lender who is inquiring for the specific purpose of extending you credit. When you check your own score, that is called a "soft inquiry" and does not count against you. Numerous hard inquiries, however, can have a negative impact on your score because it indicates that you are a distressed borrower who is desperate for more credit.

You are entitled to a free copy of your credit report every year from each of the three major credit bureaus. You can visit the credit bureaus' individual websites for more information.

When you get a loan from the bank, or apply for a credit card, what you are really doing is asking the bank to extend you credit. This means that you are making a promise to the bank that you will pay back the money that they are lending you. The bank agrees to lend you the money based on your declared intention to repay, your trustworthiness as a borrower, and your financial ability to repay. If your trustworthiness is in good standing, and you have demonstrated an ability to repay loans in the past, that is the real meaning of having "good credit."

Being able to use the system of credit responsibly is a big part of developing your own financial independence and maturity. It requires an ability to accurately assess what you are able to pay within your means, and also a commitment to being true to your word. As you develop a credit history, your credit score will improve and you will have a more favorable credit rating with banks and credit card companies. A good credit rating means lower interest rates and better terms on loans, and a higher approval rating for mortgages, auto loans, and other forms of consumer credit.

In today's world, credit is used for many large scale purchases such as homes, automobiles, educational expenses, or home improvements. You can also pay for ongoing services with credit. For example, when you purchase cable or telephone services, the cable and telephone companies are extending their services to you in advance, so essentially, you are paying for those services on credit.

Having "good credit" determines whether or not you qualify for a loan, and at what rate of interest you can borrow. A good credit score means you get better rates, higher credit limits, and other benefits. It's important to know your credit rating if you plan to apply for a home loan, car loan, or any other form of credit.

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