What is Credit?

The extension of Credit is when one party, business, or financial institution, agrees to provide money or resources to another party, usually an individual, with the understanding that the receiving party will not reimburse the first party immediately, but promises either to repay or return those resources in installments at a later date.

Credit Bureaus

The three nationwide credit bureaus do not make lending decisions

 

Credit bureaus receive information from your lenders and creditors

 

Regularly reviewing your credit reports is important to ensure your information is accurate and complete

 

The simplest answer is that credit bureaus are data collectors. Credit bureaus, also known as credit reporting agencies, do two things:

 

1. They compile your credit history based on your credit accounts, using your Social Security number or other identification information. 

 

2. They provide your credit information, in the form of credit reports, to lenders and creditors to help them determine your creditworthiness. They also provide credit reports to you, so you can better understand your credit situation. Your credit history, including factors such as your payment history and your amounts owed, are used along with other factors to calculate your credit scores. 

A frequent misperception about the three nationwide credit bureaus (Equifax, Experian and TransUnion) is that they make lending decisions. Credit bureaus provide some of the information creditors and lenders use to help them make important lending decisions. While credit bureaus collect credit information in order to make it available to certain third parties, the decision to deny or approve someone credit ultimately lies with the lender or creditor. Each lender and creditor may have its own criteria.

Credit bureaus use different sources for collecting information, and not all third parties report to the three major credit bureaus. This means that each of your credit reports may contain different information. Creditors keep the credit bureaus updated with your account status and payment history — two factors that contribute to your credit scores.

Speaking of credit scores, there are many different credit scoring models used by credit bureaus and other entities. As a result, your credit score may vary between the three nationwide credit bureaus — even if all of your creditors report to all three. While many do, some creditors may report to only two, one or none at all. 

Types of Credit

Installments Loans:  Loans that require payments in pieces, installments, on a fixed schedule are known as installment loan.  The balance is a set amount and can only be decreased via payments, increases are generally disallowed.

Revolving Credit:  Credit cards, personal lines of credit or home equity lines of credit are similar to the payment structure of an installment loan.  The key difference of revolving credit is that you can add to the balance.  This type of credit permits new charges to occur up to the maximum approved amount

Score Factors

Payment History - Your accounts with different creditors are listed, along with the balances, high balances, and outstanding balances. Related events, such as referral of an overdue account to a collection agency, charge off accounts or other delinquencies may also be noted.

Amounts Owed - It is important that you are not using all of your available credit. If your credit card is maxed out or has an utilization percentage of 30% or more; your scores will reflect that you are not managing your debt wisely.

Credit History Length – When it comes to credit, time matters.  Simply stated, the longer your history of holding accounts is, the more trusted you will be as a borrower.

New Credit – The credit bureaus must maintain an accurate record of all creditors who have requested your credit history within the last year. It is generally beneficial to keep the number of inquiries as low as possible; an increase in inquiries will directly affect your credit score.

 

Credit Mix: The types of credit in your credit profile contribute to your credit score.  A blend of revolving and installment credit helps to build an ideal credit mix.  A great strategy is to use your revolving credit, such as a credit card, and pay the bill in full every month.  This action builds positive credit history and avoids additional charges such as interest.