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How Credit Works

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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 and show exactly how credit works.

Find Out Where You Stand

You can check your credit score each month using’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.

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The Basics of the Credit Reporting System

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.

How the Credit System Works

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.

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