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What is credit?

What is credit?

Credit scores is a number created by the credit bureaus based on your payment and financial history that tells lenders how risky is to lend your money.

Lenders, merchants and service providers (known collectively as creditors) grant credit based on their confidence that you can be trusted to pay back what you borrowed, along with any finance charges that may apply. Therefore, creditors take a more objective approach. Typically they look to your credit history, your record of borrowing and repaying funds compiled in your credit file as a way to determining whether to approve you for a loan or not.

Information in your credit report includes:

  • The number of credit card accounts you have, their borrowing limits and current and outstanding balances
  • The amounts of loans you’ve taken out and how much of them you’ve paid back.
  • Whether your monthly payments for your accounts were made on time, late or missed altogether.

Good credit is not only necessary if you plan to borrow money for major purchases, such as a car or a home. But credit directly affects how much you pay for your purchases, since lenders will adjust their interest rates based on your credit as a way of managing the risk of lending. This means that the lower your credit the higher your interest rates and your down payments.

A higher credit score can mean better interest rates and terms on loans and credit cards. Many cards issuers also reserve their most enticing rewards cards for customers with great credit.


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