Credit is an agreement between you and a lender to borrow money that you’ll repay later. Credit can also refer to your individual credit history, which is used to assess your creditworthiness.
Understanding how the two facets of credit interact can help you make the most of your financial plan.
What are the types of credit accounts?
There are several different types of loans and credit cards you can use to accomplish your financial goals, but they all generally fall under two umbrellas: installment credit and revolving credit.
Installment credit provides you with a lump-sum amount, which you’ll repay in regular installments over a fixed period. Revolving credit allows you to borrow up to a certain limit, pay it back and borrow again.
What is a credit report?
A credit report is a history of your dealings with credit. If you’ve used credit, you likely have three credit reports, one from each of the three national credit reporting agencies: Experian, TransUnion and Equifax.
Your credit report lists several important details about your dealings with creditors and other entities that furnish data to the credit bureaus, including:
- Personal information: In this section, you’ll find information you’ve provided to creditors when applying for credit. This includes:
- Your name, any aliases and past names you’ve used
- Current and previous addresses
- Phone numbers
- Your date of birth
- Current and previous employers
- Credit accounts: Also called tradelines, these entries include important details about accounts you’ve opened and closed in the recent past. Information may include:
- Open and close dates
- Original and current loan balances
- Monthly payment amounts and payment history
- Collections: If you’ve defaulted on a debt, the creditor may sell it to a collection agency, which may report the past-due debt to the credit bureaus as a separate account.
- Inquiries: When a company reviews your credit report—with or without your authorization—it’ll result in a hard or soft inquiry. In this section, you’ll be able to see which companies have run inquiries on your credit reports. It’s important to note that soft inquiries, which can occur without your permission or knowledge, won’t impact your credit score.
- Public records: If you file for bankruptcy, the public record will show up on your credit reports and remain there for up to 10 years from the filing date.
How does credit reporting work?
The national credit reporting agencies collect information from lenders who report it. For example, if you have a credit card, it’s likely that your card’s issuer reports your account activity to one or more credit reporting agencies once a month.
The agencies then collect and organize the information into tradelines. Depending on the type of credit, you may see several different pieces of data, including recent payment history, monthly payment, balance, and original loan amount.
How to apply for credit
For many consumers, building solid credit is an important step in establishing financial security. Here are some steps you can take to evaluate all of your options before applying for credit and building your credit history.
Check your credit score. Before you apply for credit, it’s important to know where you stand. Checking your credit score is the simplest way to gauge your creditworthiness.
Review your credit reports. If your credit score needs some work, take some time to review your credit reports to pinpoint which areas need some attention. If your financing need isn’t urgent, consider taking time to improve your credit based on what you find in your reports.
Evaluate your options. Depending on your situation, you may be considering different types of credit. Research and weigh each option carefully to determine which one is best suited for your situation and needs.
Shop around. Once you’ve decided on the type of credit you want, shop around and compare offers from multiple lenders. Depending on the type of credit, you may be able to get prequalified without any impact on your credit score, allowing you to compare interest rates, fees and other terms with no commitment.
Submit an application. After you compare your options, choose the lender that offers the best deal for your needs and goals. You’ll typically need to provide information about yourself, your financial situation and your desired terms. Some loan types and lenders may also require documentation to prove your identity, income and residence.
For more information on credit, see the following articles: