Credit is your reputation as a borrower. It tells others how likely you are to repay your loans. Credit is made up from information about your borrowing history. Most of the information comes from your credit reports.
A credit report contains information about your borrowing history. Lenders provide information that ends up on credit reports. How much you borrow, your repayment history and other details about your borrowing behavior are on your credit report. When someone wants a credit report, it is requested from a credit reporting company. These agencies collect and distribute all of your information.
Credit agencies use your credit history to determine a credit score. These scores are determined by a computer program that runs through your credit report. It looks for patterns (such as on time payments), characteristics and any red flags that may need to be tended to. Credit scores are used for multiple areas in your life such as lending decisions for cars or mortgages, insurance and even employment approvals.
If you do not have a credit history, lenders do not know if they should lend you money. It is not able to be determined if you are a responsible debt-payer or a bad risk. You need to build credit in order to prove your creditworthiness. Young adults who are just starting to learn about financial responsibilities need to build credit. However, remember that credit can be a useful tool but it can also get you into trouble. After you begin building credit you may be inundated with tempting new credit offers. Banks, credit card companies and others will want to loan to you as you are a good borrower. Don’t take every offer — only borrow money when it is truly beneficial to you.
After you build credit, you must monitor it. The US Government requires that the credit bureaus provide an annual free credit report to you and you should take advantage of this right by visiting the site below under additional resources.
Getting your first credit card is a big step and one that affects your future. Follow these basic guidelines for responsible credit card use.