Credit 101

Lesson 1 : What is Credit?

What is Credit?

Credit is your ability to borrow money on the promise that you will it pay it back later. It is applied in many different aspects of money and finance, e.g., paying with a credit card, buying a car, and accepting a loan.

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What is a credit score?

Your credit score is what lenders use to decide if you should be allowed to borrow money and at what price, so it’s important to understand how this crucial figure works and what you can do to improve it. Putting in a little effort now to increase your credit score even a few points can make thousands of dollars of difference in interest payments down the road.

If you’ve never had to borrow money, your credit score may not be something you’ve spent much time considering until now. Once you get to a stage in life where you need to open a credit card, get a mortgage, or take out a loan, however, your credit score will suddenly become absolutely crucial, and being unprepared can mean missing out or paying more. Regardless of where you are in life, your credit score should be a priority.

A credit score is a number ranging from 300 to 850 that reflects:

  • how much you currently owe
  • your ability to make payments
  • your track record to date for paying back previous lenders

Financial services companies use your credit score to determine if you are eligible for a loan or credit card and at what interest rate and credit limit.

Who Determines My Credit Score?

A credit score is reported by three private companies called national credit reporting agencies or, for short, credit bureaus:

  • Equifax
  • Experian
  • TransUnion

While the algorithms used to calculate scores at these agencies are very similar to one another, there are slight differences in what they weigh and what information they collect. If you have a solid credit score at one agency, however, you will likely have a good credit score at other agencies.

It is important not to confuse credit reporting agencies, which assess consumer creditworthiness, with credit rating agencies, which give letter grades to bonds floated by corporations and governments.