You may only think about your credit when you're preparing for a big purchase or life change, such as moving to a new home or apartment, buying a car, or taking out a loan to pay for your kid's college tuition. But even when it's not top of mind, your credit activity is being recorded and your credit score is changing.
Understanding what credit is, what affects credit and how credit is used can empower you take control of your financial health.
What is credit?
Credit is the concept of using tomorrow's money to pay for something you get today, and your promise to repay your debt over time. Lenders extend credit based on their evaluation of your finances and your ability and history of repaying debts.
Good credit demonstrates that you can manage money responsibly, and having good credit gives you more purchasing power because you have the ability to borrow more money.
Credit can determine your interest rate on loans; the rate on your home or car insurance; and even the security deposits on a rental home, secured credit card or utility services.
What is a credit score?
A credit score is a number that summarizes your credit profile and predicts the likelihood that you'll repay future debts.
Your credit score is generated based on a computer model, and the most commonly used scoring model, the FICO® score, ranges from 300 to 850 points.
The primary factors that affect your credit score are the following:
- Payment history
- The amount of debt you owe
- How long you've been using credit
- New or recent credit
- Types of credit used
Each factor is weighted a little differently in your score.
It's important to note that your credit score changes as you go about your daily life, using credit cards and paying your bills.
What is a credit report?
A credit report is a detailed document of your credit history. This record of your credit usage lists your debts and whether you paid them back on time.
Lenders, creditors, landlords, utility companies and insurance companies often request a copy of your credit report to help them determine the risk of doing business with you.
Your credit report includes:
- Your current and previous address.
- Your current and previous employers.
- Your debts.
- Your payment history with companies that have loaned you money. This includes banks, credit card companies, mortgage companies, and other lenders or department stores. Your history shows whether you paid these bills on time and the proper amount due.
- Public record financial information such as tax liens, bankruptcies or foreclosures, even if they happened up to 7-10 years ago.
- Inquiries made by potential creditors or other entities, which happen when you apply for credit.
- A list of accounts that have been referred to a collection agency due to a default.
You're entitled to receive a free copy of your credit report each year from all three major credit bureaus via annualcreditreport.com.
What is a credit score used for?
Lenders and potential creditors use your credit score, along with your credit report and other information in your application, to determine whether you'll get a loan or credit card. Your credit score can also determine your interest rate, credit limit and the types of loan products you qualify for.
By using credit scores, lenders and creditors treat each person objectively. Credit scores apply the same standards to every applicant, assessing risk in the same way for every borrower, every time. Your credit score never factors in demographic differences, such as income or age.
What behaviors are good for credit?
Here are some actions you can take to help build and maintain your credit:
- On-time payments
- Keeping debt load manageable
- Using as little of your credit limit as possible
- Paying the full amount due, or at least more than the minimum amount due
- Reviewing credit reports annually
- Not shopping for too much credit
If you are comparison shopping for a mortgage, auto or student loan, your credit won't be adversely affected by each inquiry as long as all the requests are made within a limited time period, 15-45 days.
How can I improve my credit score?
Here are tips to improve your credit score:
- Pay bills on time.
- Pay your credit card bill in full, if you can.
- Don't charge more than you can afford to pay back.
- Use a small percentage of your credit limit.
- Keep only a few credit cards or credit accounts open.
- Pay down debts.
- Open and keep credit accounts in your own name.
- Dispute inaccuracies in your credit report.
If you need to build or rebuild credit, be patient. The best practice is to review your credit regularly and manage your credit wisely over time.
Can I be denied credit?
If your application for credit is denied, it's important to get a copy of your credit report so that you can see if there are errors or specific items you should work on.
If you're denied credit, creditors are required by law to provide you with contact information for the credit bureau that provided the credit report or credit score they used to deny your application.
By contacting the credit bureau within 60 days of receiving the denial, you are entitled to a free copy of your credit report from them.
If your credit application was denied due to lack of credit, ask the lender or creditor if they'll consider using nontraditional credit items to help you qualify. Using nontraditional credit means the lender looks at other types of payments, such as proof of paying rent or utility bills on time.
To learn more about managing credit, use our suite of financial capability and homeownership education resources, CreditSmart® — also available in Spanish. From managing debt to buying a home, you can learn it all at your pace, on your terms. Learn more about CreditSmart.
CreditSmart®: Financial Education on Your Terms
Education has power, and it’s in your hands with the CreditSmart® suite of financial and homeownership education resources. Whether you’re renting a home, are on the path to homeownership or saving for the future, CreditSmart — also available in Spanish — has something for you.Learn more