How Credit Works – The Basics

What credit is…

Credit is a way for companies (and people) to evaluate how risky it might be to lend you money for a car, give you a mortgage for a house, or rent you an apartment. Your credit is a history of your reported financial behavior. It’s your reputation with regard to managing your debts and financial responsibilities. 

What else is credit? It’s completely changeable, so don’t give up if your credit isn’t great. You’ll get there.

What credit isn’t…

Credit is NOT a comprehensive picture of your financial life, and it is not a reflection of you as a person. It’s a very specific look at very specific pieces of your financial life. 

Credit is NOT permanent (although sometimes it can feel like it is).

Credit is NOT impossible to improve, no matter what your situation. So don’t give up.

What’s included in my credit report?

The credit bureaus keep track of:

  • Your identifying information: name, address, social security number, date of birth, and employment information.
  • Trade lines: any account you have with someone that has extended you credit – credit cards, auto loans, personal loans, mortgages, etc.
  • Credit inquiries: any time someone checks your credit
  • Public records: things like tax liens, bankruptcies, etc.
  • Collections: some (but not all) debts that have been referred to collections agencies

What are the credit bureaus?

Your credit score is not the same as your credit report

  • Your credit score is not part of your credit report – it’s a “grade” from 300 – 850 based on the information in your credit report.
  • Your credit score differs based on which scoring model is being used, and which credit bureau is being referenced.
  • Just because someone gets your credit report doesn’t mean they get your credit score.

What’s a credit scoring model?

A scoring model is a method for determining your credit score based on the information in your credit report. Long story short, the original credit score model was FICO. We won’t get into detailed history here – suffice it to say that FICO scores are still the most commonly used scores by US lenders, and we recommend that you pay particular attention to your FICO scores. However, there are many other scoring models. Another popular model you might see is VantageScore.

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