What is Credit? - Debt Free Spending

What is Credit?

Google’s dictionary defines credit as “The ability to obtain goods or services before payment, based on the trust that payment will be made in the future.” It’s your financial trustworthiness. Your credit report and score are the biggest factors that lenders use when deciding on your loan/credit application. Consumers use credit in their everyday lives by taking out credit cards, loans, mortgages, and any other form of debt where they will be expected to pay that money back plus interest. This is how banks and lending organizations make money, by collecting interest on the amount you’ve paid.

A person’s credit is generally shown in a credit report or credit score. There are three main reporting agencies that lenders use when pulling these items. TransUnion, Experien, and Equifax. Every time you fill out an application, you always have to list your Social Security Number, name, address, and date of birth. These identifying factors are used to establish your credit. Each time you fill out an new credit application, the only factor that will possibly change is your address, so each address is put on file with the reporting agencies when you move and apply for credit.

Each time you take something out on credit, whether it is a credit card, loan, or mortgage, your payments are tracked and reported by your lending agency. For example, you take out a mortgage through your local bank. Each time you make your payment on time, this is reported to the credit reporting agencies mentioned above. These regular, on-time payments are what help to build your credit. However, if you fail to make payments on time, this is also noted on your credit, and it causes your credit score number to drop.

This is also why many eighteen-year-olds have difficulty getting a credit card, because they have no credit established. I have also helped family members apply for secured credit cards, where you pay money up front to use on the card (just like a pre-paid), only your deposit is kept in case you fail to make payments. The upside is that if you do make your payments each month on time, the secured credit card company reports this as a positive on your credit score!

Each adult citizen in the U.S. is also entitled to one free credit score per year.