Simply put, credit allows you to buy now and pay later. It's often used for large purchases like an education, a car or a house. Typical forms of credit include credit cards, education loans and mortgages. You can apply for credit from a lender and, if you are approved, use the money the lender provides to make the purchase. The lender charges you interest on the amount you borrow. The amount borrowed, and the interest charged, have to be paid back, meaning that over time you pay more for the item than the original price.
Lenders look at your credit history when deciding whether or not to lend you money. Your credit history is detailed in your credit report. Your credit report includes information about all your past and present credit transactions, including credit cards and loans. It lists when the accounts were opened and closed, how much the payments are, the outstanding balances, and most importantly, whether payments are made on time.
You should check your credit report at least once a year to ensure that the information is accurate. You can receive one free credit report per year from each credit bureau by contacting the bureaus directly, or online at www.annualcreditreport.com.
There are three major credit bureaus that provide credit reports to lenders and to individuals who request them:
Your credit score is calculated from the information contained in your credit report. The most commonly used credit score is FICO® (named after its creator, Fair Isaac Corporation). FICO scores range from about 350 to 850. The higher your credit score, the better. A high score means that you're considered a low credit risk and are likely to repay your debts on time. Lenders give borrowers with high credit scores lower interest rates and better terms.
To earn and maintain a high credit score, it's very important to pay back your debt on time. There can be consequences, such as fees and interest rate increases, for being late on only one payment.
To learn more about the information included in your credit report, to see a detailed example of how a high vs. a low credit score can affect you, and to get advice about what to do if you are having difficulty making payments, view our Extra Credit booklet.
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