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Get Smart About Credit
Sponsored by the American Bankers Association
What is credit?
Credit is the arrangement that allows you to borrow money now, and pay it back later.
What is a credit report?
A credit report is just that- a report that contains information about a person's credit. It lists your debts, including how much you owe on credit cards, auto loans or home loans. It also has information on how much you owe for each card or loan, and how you manage payments. For example, do you pay on time or are you often late? Do you pay balances in full each month, or just the minimum?
This is sometimes called your credit file or credit history. A credit report also has information on where you live and work. It shows whether you have declared bankruptcy, or have had any tax liens or monetary judgements entered against you that you are paying or have failed to pay.
Where does the information in a credit report come from?
In the U.S., we have three credit reporting agencies- Experian, Trans Union, and Equifax. They gather information from various creditors to generate your credit report. Since they gather data independently, the information in one credit report may differ from what is in another. That's why it is important to check each credit report annually and correct any mistakes.
How is this information used?
Creditors- the companies that make loans or give you credit, which includes banks, car dealerships, and retailers- can check your credit report with your permission. Even employers do this. They see it as a record of how you've managed credit so far, and how you may manage it in the future. And that affects whether or not they decide to give you credit to buy that car or rent that apartment- even to give you a credit card. They want to know if you can manage your money well.
What is a Credit Score?
Your credit score is a numerical three-digit score that represents your credit-worthiness, usually ranging from 300 to 850. The higher the number, the better your score.
It's important to remember that number can change. It will depend on how much available credit you have, and how much of that credit you have used. It also depends on how you've been paying-or not paying-your debts. Or if you have declared bankruptcy or owe taxes or have a judgement in a lawsuit showing in your credit report. It is calculated in this way: 35% is based on payment history, 30% on outstanding debt, 15% is based on the length of time a consumer has had credit, 10% is based on the amount of inquiries into a report, and 10% is based on current types of credit.
How do I Monitor my Credit Report?
Once you turn 18, monitoring your credit report is actually pretty easy. And it's even free. The government lets you request a free copy of your credit report from each of the three reporting agencies annually. If you're not 18 yet, your parents can request your credit report for you. Order a copy of your credit report annually from www.annualcreditreport.com or by calling 1-877-322-8228.
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