Credit Confidence: Understanding Credit And Using It Wisely
Provided Courtesy of Wells Fargo

Why Care About Credit?
One of your best assets is your good credit history. Strong credit references can open a world of financial opportunity - whether it's financing your education, renting an apartment, or meeting criteria for a job. On the other hand, poor credit will follow you for years and can hurt your chances for other loans in the future.

Your credit history is part of what affects the lender's decision to give you a loan or line of credit, how much you can borrow, and what interest rate you will pay. But if you have no credit or less-than-perfect credit, it doesn't mean you can't get a loan. Many lenders consider a nontraditional credit history, such as proof that you've paid your rent and utilities on time.

In addition your credit history can influence:

• The day to day. You may need good credit for such routine matters as having utilities connected to your home, or getting a cell phone.
• Jobs. Employers often check the credit of prospective employees. A solid credit history reflects positively on your ability to manage your job responsibly.
• Apartments. Renting an apartment may be easier. A good credit rating tells landlords that you are a person who's more likely to pay the rent on time.
• Education. Credit can affect your ability to get a loan to help cover tuition.
• Your business. Your personal credit can affect your ability to get a loan to start or grow a small business.
• Insurance. Credit history is often a factor in determining your auto, homeowners, and renter's insurance rates.
  

How Lenders Evaluate You Credit
When lenders are trying to decide whether or not to give you a loan, one of the many things they review is your credit history. If you've managed your debts responsibly in the past, it shows that you're likely to pay back what you borrow - in other words, you're a "good" credit risk.

Lenders often buy both a credit report and a credit score from the credit reporting agencies: Equifax, Experian, and TransUnion. Some lenders create their own credit scores.

Credit Reports
Your credit report is a detailed list of your credit history. It consists of information provided by lenders who have extended credit to you. The lender information may vary from one credit reporting agency to another, but includes the same types of information - which lenders have extended credit to you, what types of credit you have, your payment history with lenders, and more.

Identifying information such as your name, date of birth, and employment history is listed on your credit report, but is not used to determine your credit score.

Credit Scores
In addition to the credit report, lenders may also use a credit score that is a numeric value based on the information contained in your credit report. That score (usually between 300 and 850) is calculated by a statistical mathematical formula that evaluates various types of credit report information.

The credit score identifies to the lender the level of future risk associated with your credit history, as compared to hundreds of thousands of other credit reports. The higher the score, the lower the risk.

The way you've handled credit in the past is often a good indication of how you will manage credit in the future. Your credit score is a snapshot of your credit risk picture at a particular point in time. When your credit information changes, so does your credit score. That's why lenders obtain your most recent score whenever you apply for credit.

Credit bureau scores are often called "FICO scores" because many credit bureau scores used in the U.S. are produced from software developed by Fair Isaac Corporation (FICO).

While many lenders use credit scores to help them make their lending decisions, each lender has its own criteria, including the level of risk it finds acceptable for a given credit product. There is no single minimum credit "cutoff score" used by all lenders, and there are many additional factors that lenders use to determine your actual interest rates.