Credit Basics

Credit plays a critical part in nearly everyone's life, but understanding what credit is and how it works can be a challenge. A great way to understand the role credit plays in your life — and to empower yourself as a consumer — is with a basic knowledge of credit fundamentals.

What is credit history?
"Credit History" is the history of how you have handled credit in the past. Your credit report keeps track of your payments on credit cards, installment loans, and other credit accounts. It answers questions like: Do you pay on time? Do you pay late? Do you pay slow? And more. It is your financial track record.

Why your credit history is important
Although creditors usually look at a number of things when they decide whether to give credit, most creditors focus mostly on your credit history. To learn how you have handled credit in the past, most creditors obtain a report from your local Credit Bureau. Credit Bureaus gather and sell credit information about consumers and are a primary, trusted source of information about your credit history. Your Credit Bureau report is based on information supplied over time by your creditors. It also provides information on where you live and work and may note other matters of "Public Record" such as judgments or bankruptcies. Your report records payments you have made on credit cards, installment loans, and other credit accounts and helps creditors predict whether you are likely to be a good credit risk. A history of timely credit payments helps you get additional credit.

Some creditors don't want to grant credit to consumers who have not established a "track record" with other creditors first. Plus, many creditors will not extend credit to consumers with a history of delinquent payments, repossession, judgments, or bankruptcy. If you are in either situation, beware of ads that promise you "instant credit" or "a major credit card regardless of your lack of credit history or your past credit record." The fact is that all legitimate creditors want to know whether you are likely to be a good credit risk. Whether you get credit will depend on whether your qualifications meet the creditor's standards. No one can guarantee you credit in advance.

Understanding your credit report
Credit reports are playing a much bigger role in our financial lives than ever before. It is also important to know that recent studies prove that up to a quarter of all credit reports contain errors. So, you should keep tabs on what your credit report says about you.

No longer are the reports used just for deciding something like the interest rate on a loan. Today, some employers check them to screen job applicants and some insurance companies use credit scores in figuring out policies, a controversial practice.

There are three major Credit Bureaus. They are Experian, Equifax, TransUnion, and they compile information about your credit history from merchants and lenders. Negative information does not always show up on all three bureaus. It is important to keep in mind that just because one bureau reports one negative item, does not mean the others will show the same. In this section, we tell you more about Credit Bureaus and the role they play in tracking your credit history, and provide you tips on making sure your reports are accurate.

Quick Tip: Our staff likes the three-in-one report from MyFICO, which includes data from all three bureaus presented side-by-side. A full explanation of your score and how lenders view your credit risk. A personalized FICO score analysis give you a detailed, plain-language explanation of your current score.

To obtain your FICO Score Reports, click here.

What is the Fair Credit Reporting Act?
The FCRA (Fair Credit Reporting Act) was created to encourage accuracy and ensure the privacy of the information used in consumer reports.

Businesses that supply information about you to CRAs and those that use consumer reports also have responsibilities under the law.

The FCRA is enforced by the Federal Trade Commission. For further details, you can find the complete text of the FCRA on the Federal Trade Commission's web site:
http://www.ftc.gov/os/statutes/fcra.htm.

Am I eligible for a free credit report?
You are eligible to receive a free copy of your credit report if:

If you are a resident of Colorado, Massachusetts, Maryland, New Jersey, or Vermont, you may receive one free copy of your credit report each year from the Credit Bureaus. If you are a resident of Georgia, you may receive two free copies of your credit report each year from the Credit Bureaus.

Illinois law, 815ILCS505/2B.2 (Solicitations Regarding Records): MANY GOVERNMENT RECORDS ARE AVAILABLE FREE OR AT A NOMINAL COST FROM GOVERNMENT AGENCIES. CREDIT REPORTING AGENCIES ARE REQUIRED BY LAW TO GIVE YOU A COPY OF YOUR CREDIT RECORD UPON REQUEST, AT NO CHARGE OR FOR A NOMINAL FEE.

• To obtain a copy of your credit report from Experian:
Mail request to: P.O. Box 2002, Allen, TX 75013 Or call toll-free (888) Experian (888-397-3742)

• To obtain a copy of your credit report from Equifax:
Mail request to: PO Box 740241, Atlanta, GA 30374 Or call toll-free (800) 685-1111

• To obtain a copy of your credit report from TransUnion:
Mail request to: 2 Baldwin Place, PO Box 1000, Chester, PA 19022 Or call toll-free (800) 888-4213