What Is Credit and How Does It Work?
Credit is a prettier word for debt. When you obtain credit you
are borrowing money, or getting the right to access money (like
a credit card, for example), and you agree to pay back the
person or company that loaned you that money. In these type
transactions, you are the "borrower" or "debtor" and the person
or company who lent you the money is the "creditor". Part of the
terms of the loan is the interest amount that you will pay for
the right to use the creditor's money. Interest is simply money
that you pay for the right to borrow money.
When you make a credit transaction, you are creating a debt that
you are legally obligated to pay back. The most common types of
credit transaction are loans and credit card purchases.
How do creditors decide whether or not to lend me money?
Creditors make decisions about whether or not to lend you money
based, in part, upon a profile of your past credit performance
that is kept in files that are maintained by companies known as
"Credit Reporting Agencies" (CRA's) or "Credit Bureaus" (CB's).
How do credit bureaus work?
Before credit bureaus came into existence, most creditors kept
individual records on their relationships with borrowers and did
not share that information with anyone else. If you needed
credit from a company that had no history of credit dealings
with you then you would provide them with a list of companies
that you had already done business with and they would write
each company to find out how you had performed under your
agreement. As credit lending grew, this process became
cumbersome and credit bureaus were formed to act as central
clearinghouses.
Credit bureaus collect information about your payment history
from their member companies. Member companies are creditors who
have an agreement with the credit bureau to report their credit
experiences with you.
The credit bureau accumulates all of this information and stores
it in a computer database. The bureau makes the information in
this database available to other member companies who are
considering granting you credit.
The credit bureau is an impartial reporting agency. It does not
make a decision whether or not to grant you credit. It only
provides the information that it has on you to the creditor who
makes the final decision.
The credit bureau makes money by charging the creditors for
access to your information.
In the U.S., there are three major Credit Bureaus. They are
TransUnion (1-800-888-4213), Equifax (1-800-685-1111), and
Experian (1-800-311-4769.) There are many local and regional
credit bureaus as well, but most of these obtain their
information from the major credit bureaus. Not all creditors
belong to all three bureaus. As a result, a creditor may see
only a portion of your entire credit history if they do not
request reports from the three major bureaus.
Credit can help you or hurt you. It all depends on what you know
about credit and how you use your credit. Learn as much as you
can and your good credit will always be there to help you.