Collegiate Guide to Credit

What Is Credit and How Does It Work?

You are most likely already familiar with the concept of "credit," the reputation for paying your bills on time that makes it possible for you to obtain money or goods with the understanding that you will pay for them later.

In fact, you probably have already put your credit to work for you. You employed it when you obtained an auto or student loan, used your credit card to pay for a trip or new suit, or were chosen as the tenant for your rented apartment or house. A solid history of paying your bills may also have been just the objective character reference needed to help you land your job, too.

But even if you use your credit every day, you may have questions about the credit industry and how it affects you. In today's society, credit is much more complicated than keeping a tally at the local grocery. As a credit-active consumer, you need to know how credit reporting works and what your credit report contains. Find out for free with a FREE credit report.

What Is a Credit Bureau?

A credit bureau or credit reporting agency is in the business of gathering, maintaining, and selling information about consumers' credit histories. It collects information about consumers' payment habits from credit grantors like banks, savings and loans, credit unions, finance companies, and retailers. The credit bureau stores this information in a computer database and sells it to credit grantors in the form of credit reports. When you apply for a new credit card or loan, the credit grantor orders your credit report from at least one credit bureau and analyzes the information to decide whether to grant you credit. The credit bureau charges the credit grantor a fee for every credit report sold.

Although credit reporting agencies provide your credit report to lenders when you apply for credit, they do not make actual lending decisions. It is up to individual lenders to evaluate your credit report and any other factors they consider important and then decide whether or not to offer you credit.

The Three Consumer Credit Bureaus

There are three major credit bureaus providing nationwide coverage of consumer credit information in the United States: Equifax, Experian, and TransUnion. Although many national lending institutions report consumer credit information to all three, smaller banks and other credit grantors may report to only one--or even none. Therefore, your credit report from one credit bureau is not necessarily exactly the same as your credit report from another. It's easy to see all three of your files in one report with a 3 Bureau Online Credit Report.

What Exactly Is a Credit Report?

A consumer credit report is a document that contains a factual record of an individual's credit payment history. Credit grantors are permitted by law to review your credit report to objectively determine whether to grant you credit. There are 190 million credit active people in the United States who have a charge account, car loan, student loan, or home mortgage. As those people pay their bills, most lenders report credit payment information to credit bureaus. So most of the information in your consumer credit report comes directly from the companies you do business with.

What Information Does a Credit Report Contain?

A consumer credit report contains four types of information: identifying information, credit information, public record information, and inquiries.

Identifying information includes:

• Your name
• Your current and previous addresses
• Your Social Security number
• Your year of birth
• Your current and previous employers
• If you're married, your spouse's name

• Banks
• Retailers
• Credit card issuers
• Other lenders

• Bankruptcies
• Tax liens
• Monetary judgments

Inquiries indicate to other credit grantors that you have applied for new credit that could result in additional debt. Potential lenders view multiple recent inquiries on your credit report as a sign that you are overextending yourself.

(A credit risk score may also be included when your report is provided to a credit grantor, although it is not included on consumer review reports. The ways to calculate and use a credit score vary widely, so a score has little meaning outside of the context of a particular lender's unique guidelines for use. Therefore, it is not included on consumer review reports.)

What is a Credit Risk Score?

A credit risk score is a statistical summary of the information contained in a consumer's credit report. The most well known type of credit risk score is the Fair, Isaac or FICO score. Sophisticated mathematical processes calculate the score by assigning numerical values to various pieces of information in the credit report. Credit bureaus provide risk scores to credit grantors who use them to objectively evaluate an applicant's credit-worthiness. The score itself is relative and will be viewed differently by creditors depending on numerous factors, including the creditor's risk level, marketing goals, and business practices. Your risk score will change over time as your credit history develops. See What Is a Credit Score? for more detailed information.

Does a Credit Report Contain Other, Unrelated Personal Information?

No. Your consumer credit report does not contain information about your race, religious preference, medical history, personal lifestyle, personal background, political preference or criminal record.

How long Does Information Stay on My Credit Report?

Positive credit information remains on your report indefinitely, although information about an account will cycle off your report if no new information is reported about it for seven years. (Thus, a closed account will disappear from your report seven years after it is reported closed by the credit grantor.)

Most negative information remains for up to 7 years. Bankruptcies can remain on your credit report for up to 10 years. Other public record information can remain for up to 7 years.

Most inquiries stay on your credit report for up to two years.

Who May Check My Credit Report?

Federal law carefully regulates how credit reports can be used and by whom. By law, you have the right to obtain your own reports at a reasonable price. Businesses must meet the following requirements before they can access consumer credit information:

• Proof of a permissible purpose under federal law.
• A background check and on-site inspection of the business.
• A current business license.
• A signed contract requiring the business to use the data properly.

How Can I Establish--or Rebuild--Good Credit?

If you do not have a well-established credit history, you should begin to build one.

The trick is to start small: try applying for credit with a local business, such as a department store or a local bank or credit union. These local merchants may have lower credit standards than larger lenders. Before you apply for credit, make sure the credit grantor reports credit history information to one of the major U.S. credit bureaus so you can build your history.

Other options if you are having difficulty opening a credit account include asking a friend or family member to cosign your loan or credit card application or obtaining a secured card, which is guaranteed by a deposit you make with the card issuer.

Actively Monitor and Manage Your Credit

While the most obvious thing you can do to build a solid credit history is to pay your bills on time, you can also take steps to protect your credit standing and make sure your credit report is accurate when you apply for credit.

Many credit reports contain inaccuracies, usually caused by innocent errors but occasionally by fraud (such as identity fraud, in which a thief uses someone else's name to open credit accounts). The Fair Credit Reporting Act ensures your right to dispute such inaccuracies in your credit report without charge. (For information about how to do this, see our Dispute Information.)

To effectively use this right, you need to check your credit report on a regular basis. The CreditCheck® Monitoring Service is especially designed to help you do this.

You can also plan a credit strategy much like you would a budget to improve your credit worthiness. Taking steps like applying for a major credit card if you only have local credit, closing old unused credit accounts, and keeping tabs on the number of inquiries in your report can improve your credit status. See our tips on Handling Your Credit to Prepare for the Future for details.

Skip the "Credit Repair" Clinics

Although some consumers pay credit clinics hundreds or even thousands of dollars to "fix" their credit reports, only time can improve bad credit. The Federal Trade Commission has investigated and reported at length on these often-fraudulent "clinics." And some credit repair plans actually encourage you to commit fraud yourself by attempting to create a second credit identity.

The key fact: There is nothing a credit repair clinic can legally do to fix a credit report that you can't do yourself for free.

Consumer credit reports contain easy-to-follow instructions for disputing inaccurate information at no charge. Inaccurate information will be changed or deleted. Accurate information that shows negative payment habits will usually remain on a credit report for seven years, with bankruptcies remaining up to 10 years. Federal law mandates this.