Understanding Your Credit
We hear a lot about credit — credit reports, credit scores, credit freezes, and credit monitoring. What does it all mean for you?
Your credit matters because it affects your ability to get a loan, a job, housing, insurance, and more. It’s essential to understand your credit and how to protect it.
What’s Your Credit, and Why Does It Matter?
When people talk about your credit, they mean your credit history. Your credit history describes how you use money. For example:
- How many credit cards do you have?
- How many loans do you have?
- Do you pay your bills on time?
How you handled your money and bills in the past will help lenders decide if they want to do business with you. Your credit history also helps them determine what interest rate to charge you.
- If lenders see that you consistently pay your bills on time and never take on more debt than you can pay back, they’ll generally feel more confident doing business with you.
- If they see that you’re late on your payments or owe more on credit cards or loans than you can repay, they might not trust that you will pay them back.
Who cares about your credit history?
Lenders, landlords, insurance companies, and potential employers are a few examples of who might look at your credit history. Your credit history can make a big difference when you
- apply for a loan or credit card
- look for a job
- try to rent an apartment
- try to buy or lease a car
- try to get rental or home insurance
Because these lenders, landlords, and others care about how you handle your bills and other financial decisions, you might also want to care about your credit.
How Do You Know If Your Credit Is Good?
“Good” or “bad” credit is based on your credit history. You can find out your credit history by checking your credit report.
What’s in your credit report?
Your credit report is a summary of your credit history. The three major credit bureaus — TransUnion, Equifax, and Experian — collect your credit and other information. In your credit report, you’ll find information like
- your name, address, and Social Security number
- your credit cards
- your loans
- how much money do you owe?
- if you pay your bills on time or late
- if you filed for bankruptcy
Businesses pay the credit bureaus to use that information to check your credit. They run a credit check, for example, before they decide whether to lend you money, give you a credit card, or rent you an apartment.
TIP: The credit bureaus must ensure that the information they collect about you is accurate. The Fair Credit Reporting Act (FCRA), a federal law, requires this. But you want to check your credit report regularly to ensure the correct information is there. If you find mistakes, you can dispute them.
How to get your credit report
You have the right to get a free copy of your credit report every year from the three major credit bureaus: TransUnion, Equifax, and Experian. Some financial advisors suggest staggering your requests over 12 months to help keep an eye on your reports and ensure they have accurate information. The best way to get your free credit report is to
- go to AnnualCreditReport.com or
- call Annual Credit Report at 1-877-322-8228
Through December 2022, everyone in the U.S. can get a free credit report each week from all three national credit bureaus (Equifax, Experian, and TransUnion) at AnnualCreditReport.com.
And everyone in the U.S. can get six free credit reports per year through 2026 by visiting the Equifax website or by calling 1-866-349-5191. That’s in addition to the one free Equifax report (plus your Experian and TransUnion reports) you can get at AnnualCreditReport.com.
What’s a credit score?
A credit score is a number calculated based on the information in your credit report. It helps businesses predict how likely they are to repay a loan and make the payments when they’re due. You’ll see many different scoring systems, but most lenders use the FICO score.
To calculate your credit score, companies first pull information from your credit report, like
- how much money do you owe?
- whether you’ve paid on time or late
- how long you’ve had credit
- how much new credit do you have?
- whether you asked for new credit recently
Then, using a statistical program, companies compare this information to the credit behavior of people with similar profiles. Based on this comparison, the statistical program assigns you a score. Usually, credit scores fall between 300 and 850. A higher score means that you have “good” credit: businesses think you’re less of a risk, which means you’re more likely to get credit or insurance — or pay less for it. A low score means you have what businesses see as “bad” credit, which means it will be harder for you to get a loan or a credit card — and you’re more likely to pay higher interest rates on your credit.
How to get your credit score
Unlike your free annual credit report, there is no free yearly credit score. Some companies you do business with might give you free credit scores. Other companies may give you a free credit score if you sign up for their paid credit monitoring service. This kind of service checks your credit report for you. Sometimes it’s unclear whether you’ll be charged for the credit monitoring. So if you see an offer for free credit scores, check closely to see if you’re being charged for credit monitoring.
TIP: Before you pay to get your credit score, ask yourself if you need to see it. Your credit score is based on what’s in your credit history — if you know your credit history is good, your credit score will be good. It might be interesting to know your score, but you can decide if you want to pay to get it. For more on credit scores, see the article Credit Scores.