How Credit Works
by Credit.com
This simple guide shows you the inner workings of the credit system. Read about
everything from the three main credit bureaus to pre-approved credit card offers.
Our credit experts break down the complicated credit system for you:
The Basics
The credit reporting system is made up of three main players: consumers, credit
bureaus, and financial companies. Information about your credit
card and loan accounts is reported electronically
to the three national credit bureaus by each of your creditors about every 30 days.
These bureaus, TransUnion, Equifax, and Experian, collect and store your credit
information for future reference.
The three national credit bureaus don’t share information with each other.
Your credit reports from TransUnion, Equifax, and Experian can contain significantly
different information about you. It’s important to monitor all three reports
because you can never be sure which one will be used when you apply for a new account.
Businesses such as auto lenders, banks, credit card companies, and insurance agencies
use your credit data from the credit bureaus to determine if you are a risky customer.
The lower the risk, the lower the rates you will have to pay. They also use this
information to send you pre-approved offers in the mail.
Not all creditors will report your account information to the credit bureaus. While
businesses are legally required to report accurate information, there is no law
that says they have to report at all. While nearly every major creditor reports
to all three bureaus, smaller lenders and banks may not send your monthly account
information to all three or any of the credit bureaus.
Along with your credit card and loan account records, your name, address, employer,
and recent applications are recorded in your credit files. Public records such as
bankruptcies, tax liens, and judgments can also appear on your reports. Information
about your income, race, checking accounts, gender, age, religion, or health is
not included on credit reports. Most information expires from your credit reports
after 7-10 years. If there is something inaccurate on your credit reports you can
file a dispute to have it removed from your record.
It’s important to keep the information on your credit reports positive and
accurate. The data in your credit files is used to calculate your credit score.
This three digit score is a numerical representation that indicates how risky a
borrower you are from a lender’s perspective. A higher credit score (700+)
will get you the best deals on big purchases.
Your credit reports and scores impact the deals and interest you will receive when
you buy a home, finance a car, rent an apartment, apply for a job, buy insurance,
purchase a cell phone, or open a new credit card. The best way to have healthy credit
is to have a few credit cards and loans that you use responsibly and pay on time
every month. Using credit irresponsibly by making late payments and maxing out credit
limits can very harmfully affect your credit. You
can learn more about the credit system online here.
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