How Credit Works


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Though it can affect a variety of aspects of everyday life, there are a large number of individuals who don't know exactly how credit works. If you're one of these people, don't worry… you're obviously not alone, and credit isn't always the easiest thing to understand.

There are several factors that can cause changes to your credit, and your credit score is calculated in different ways depending upon which agency your credit report is requested from.

Below you'll find some basic information on exactly what credit is and what it isn't, as well as how your credit score is calculated, reported, and how it can be changed or improved.

What Credit Is, and What It Isn't

When it comes to credit, there are a lot of people who have a variety of misconceptions as to exactly what it is and what it is not.

At its most basic, your credit is simply a way that potential lenders can tell whether or not you're likely to repay any loan or financing that they offer you in a reasonable amount of time.

Your credit is based upon the reports that previous lenders and businesses with which you've had a financial relationship have given, and can be very influential in financial decisions and occasionally even matters of employment.

Credit is not, however, a complete record of every transaction that you've completed or a very specific log of all of your payments and accounts… not all lenders make reports to credit agencies, and even those who do only turn over a very limited amount of information.

Your Credit Score

As banks and lenders make reports to credit agencies, the reports are used to modify your credit score. This score is a numerical value that shows potential lenders how much of a credit risk you might be… though it's calculated differently by different credit agencies, the general rule is that a high score shows that you're risk level is very low (meaning that you have good credit), while a low score indicates that you might be a significant risk, meaning that you have bad credit.

Positive reports increase your overall score, and negative reports decrease it. Older reports eventually expire (usually after a set number of years), so that problems in the past won't drag down a good score in the future.

Credit Reporting and Credit Reports

Most lenders and financial companies will make some form of report to credit agencies at one point or another. These reports are usually very simple… often they simply state whether satisfactory payments or transactions have been made, or whether they haven't. Lenders and banks may make these reports monthly, quarterly, or yearly.

These reports shouldn't be confused with your personal credit report, though, which is the report that credit agencies send to those lenders who request it so as to evaluate your credit risk.

Your credit report contains your credit score, as well as relevant information and a list of reporting creditors dating back 1 or more years.

Changes to Your Credit

Obviously, a person's credit is very fluid and dynamic… just because they have a certain credit score now doesn't mean that they'll always have that same score.

Bad scores can be improved by making payments on time and repaying old debts, whereas good scores can be lowered by missing multiple payments and being lax with financial matters.

It's important to make all payments to lenders and other businesses on time, because failing to do so can be quite damaging to your credit… and negative reports can take years to disappear.

You may freely reprint this article provided the following author's biography (including the live URL link) remains intact:

About The Author

John Mussi is the founder of Direct Online Loans who help homeowners find the best available loans via the website.


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