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Credit 101

What is a credit score and what is a credit report? This article explains how credit reporting works and how to contact the 3 reporting agencies: TranUnion, Experian, and Equifax. Learn how credit reporting, credit scoring, and credit monitoring works here.

One of the most important aspects of your personal finances is your credit. Credit is a way for others to gauge how trustworthy you are when it comes to repaying your debts. It is basically your financial reputation. Your credit is something that all lenders mortgage, credit card, auto, and others look at to decide whether or not they think you are likely to pay your debts in full, and to make on time installment payments.

Establishing good credit is an important part of healthy personal finances. Even if you do not have perfect credit, it is important to work toward having "good" credit. When you behave in a financially responsible manner, your credit will show that you are trustworthy, and you will be more likely to get better loan terms and be viewed favorably by employers, landlords and insurance agents as well as by creditors and lenders.

The three major credit bureaus

When someone wants information on your credit history, they get it from one of the credit bureaus. These are companies that gather financial information and then compile it. This information includes public record items (such as bankruptcy and home purchases) and reported items (such as your credit card balances and payment history from utilities).

There are three major credit bureaus:
TransUnion: 800-916-8800
Equifax: 800-865-1111
Experian: 888-397-3742

Each of these credit bureaus take information about your financial habits and compiles it into a report that shows whether your payments are made on time, how much money you owe in various accounts, what types of loans you have, information on rent and utility payment history (if it has been reported) and whether you have gone over the limit on your credit cards. This information is then sold to others so that they can determine whether or nor you are creditworthy.

Credit report

The information that the three major credit bureaus gather is known as a credit report. It has a long history, going back as many as 10 years, showing nearly every transaction you have made that involves you borrowing money, or even setting up services like cable television or applying for insurance. Even job information can be found in some credit reports. Here are some of the other things that might appear on your credit report:

Current address and your address history.
Bankruptcies and tax liens.
Your birthdate.
Your spouse's name.
Information on delinquent bills.

There are laws that regulate how your credit report can be used. Banks and other lenders can check your credit report anytime, to see if you are creditworthy. Others, though, such as landlords and employers, must have your permission (usually given when you sign an application) to pull up your credit report.

Realize that with so much information out there, inaccuracies are inevitable. Sometimes duplicate accounts will show up, implying that you have more credit cards than you really do. Or an error by a bank may show that you are late on a payment. It is important to check your credit report regularly to look for such inaccuracies and have them fixed. Problems on your credit report can lead to denial of a loan down the road. You are entitled to one free credit report per year from each of the three major credit bureaus.

Credit score

Your credit score is, in essence, your credit report summarized and reduced down to a numerical value. Each of the credit bureaus has its own credit scoring system, based on the information that it has in your credit report. On top of that, there are other credit scoring systems. Basically, though, there are a few things that your credit score accounts for:

Length of your credit history.
Number of late payments.
Types of credit that you have.
Number of inquiries into your credit history in a short amount of time.
How much of your available debt you are using.

This information is then used to determine whether or not you will get a loan, and also what kind of terms you get on the loan. For instance, someone with a credit score of 750 is going to have a lower interest rate (maybe even a much lower interest rate) than someone with a score of 605. This can translate directly into money saved over the life of the loan.

It is important to develop good credit. In order to do this, it is best to make all your payments on time, pay down current debt and avoid getting into more debt. With a little time, and the cultivation of good financial habits, you can improve your credit.

Related Article: Improve Your Credit Score >>

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