Credit Frequently Asked Questions

What is Credit?

Is your past payment history of how likely consumers are to repay their loans or credit cards. Credit is made up from information about consumers borrowing history and the information comes from the consumer’s credit reports. It is a contractual agreement in which a borrower receives something of value and agrees to repay another at a later date. When a consumer purchases something with a loan or credit card they are using credit to purchase.

What is a Credit Report?

A credit report contains information about consumer’s borrowing history. Lenders and other sources provide information on payments, liens and judgments that is reported to the credit reporting companies and placed on consumer’s credit reports. The credit bureaus report how much consumer’s borrowed, how they repaid the debt and other information and details about consumer’s borrowing history. When a creditor or someone wants or needs a credit report as they request the credit report from a credit bureau. A credit report is a record of consumer’s credit activities. They list any credit accounts or loans that may have balances and how they make payments. It also shows if any action has been taken against them due to unpaid bills. A consumer credit report is a factual record of credit activities and reports all of the credit accounts and outstanding loans and the balances on credit cards and loans with the bill paying history.

What is a Credit Bureau?

Credit reporting bureaus are companies that collect and distribute all of the reported credit information and credit histories about consumers. They are credit information data warehouses that store consumers credit files.

What is Credit Scoring?

A credit score is a numerical expression derived from a statistical analysis of a person's credit files. The credit bureaus lots of information about consumers credit payment histories and credit information in their databases. The credit information is difficult for future creditors to sort through all of it, so as a result of the need for a quick credit reference the credit score was developed. Most creditors use credit scores to decide to issue credit instead of reviewing everything in the credit reports.

Credit scores are numbers generated by a computer program that goes through consumer’s credit reports. The computer program looks for payment patterns, payment history, characteristics and flags in consumer’s credit history on based what the program finds it creates a credit score.

This system was developed by lenders, such as banks and credit card companies who use credit scores to evaluate the potential risk posed by lending money to people and to mitigate losses due to bad debt.

Why is Credit Used?

Credit is used by lenders as well as other creditors for making lending decisions. Credit reports and credit scores are also used in many other areas of consumer lives. In addition to lending decisions, credit is also used for insurance and employment approvals.

How do I get a Free Credit Report?

Consumers are entitled to one free credit report each year. Simply go to the web site www.annualcreditreport.com to get your free report today. You are also eligible for a free report if you were rejected for a loan. By request of the Federal Government the three nationwide credit reporting bureaus have created a centralized web site as a resource for consumers to get free credit reports once a year.

How are credit scores calculated?

Your credit score is a three digit number that lenders use to determine whether or not you are a good credit risk. Your credit score is determined by five different categories: Payment History, Amounts Owed, Length of Credit History, New Credit, types of Credit. All three Credit Bureaus calculate credit slightly differently, but it is important to know what types of credit are considered adverse and what types of credit is considered good.

Each credit bureau will give a different number. The reason the numbers are different is because each bureau calculates or weights the categories differently. Most lenders will use the middle number what interest rate they'll give you. The higher your credit score, the less risk the bank is taking by lending you money. The lower your credit score, the higher the interest rate.

What are my rights under the Fair Consumer Reporting Act?

Everyone has the right to have an accurate credit report. If there is information on a credit report that is not accurate it is not legal. This law is designed to protect consumers from inaccurate information hurting their chance at positive credit.