What Is Credit and How Does It
Work? |
By Angela Smith |
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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 for you. |
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