The simplest definition of credit is financial trustworthiness. When a consumer is granted credit, they are allowed to borrow money to make purchases or finance expensive items. They can then pay the money back over time. Credit is granted in many forms such as student loans, auto loans, credit cards, and mortgages. Each time a consumer is granted credit, they are developing a reputation for how responsibly they handle their obligations.

Information about each individual’s credit history is gathered and maintained by credit bureaus. The payment habits of a consumer are stored by the credit bureaus in a computer database and sold in the form of a credit report to credit grantors. Potential grantors of credit evaluate the information in the credit report to determine whether or not they believe the consumer is creditworthy.

There are three major credit bureaus that provide consumer credit information in the United States. They are Experian, Equifax, and TransUnion. The largest banks usually report information to all three credit bureaus, but small banks and credit unions may report to only one. For that reason, a consumer’s credit report from one credit bureau may not be the same as the credit report from another.

Information in a consumer’s credit file is used to determine a credit score. This is a number based on a statistical analysis of the credit file, and can be calculated in many different ways. One was developed by the Fair Isaac Corporation and is known as the FICO score. This is the score usually used by mortgage lenders who want a risk-based system to try to predict the likelihood that a borrower may default on financial obligations.

Lenders such as banks and credit unions use credit information to evaluate the potential risk of loaning money to a particular consumer. Credit scores are often used to determine who qualifies for a loan as well as how much they can borrow and at what interest rate. Credit information is also used by insurance companies, cell phone companies, and potential employers to evaluate a person’s tendency to be responsible.

Credit reports do not contain information about race, religious affiliation, political preference, or criminal history. Along with information about credit accounts, they do contain identifying information such as name, address, social security number, date of birth, and current and former employers. Public information that is available in state and county records also appears on the credit report, such as bankruptcies or tax liens. Inquiries by potential creditors are listed on the report, which show whether the consumer is trying to apply for credit from multiple lenders, and may potentially be overextending themselves.

Consumers should keep track of the information on their personal credit report. Everyone is entitled to one free credit report annually.

Lenders usually offer better rates and terms to consumers with a good credit record. Consumers should take charge of their finances by controlling their spending and paying all their bills on time. Building a good credit record is an important step toward financial independence.