Managing one’s credit is one of the most important things every consumer can do to build and maintain a strong financial profile. Good credit can be thought of as the foundation that much of our financial life is built upon. Understanding the different terms of the credit business and what applies to us as a consumer in the credit world is part of being a good credit citizen. We have put together this list of some of the more important credit terms we feel every credit consumer should know.
A consumer’s credit report is made up of several different components and the report contains a wealth of information about our credit history, as long as we have taken the time to build a credit history. But with all of this information at our fingertips, how many consumers truly understand what makes up a credit report and what basic credit terms are important for every consumer to know?
We have put together a list of terms that every consumer should be familiar with as a user of credit. These are terms that every credit user will encounter at some point in the credit building and credit usage process. And knowledge of each of these terms is imperative to responsibly managing one’s credit.
Credit Bureau: there are three major credit bureaus in the US who are considered to be the “credit data managers” for all of the credit information on individuals. These credit bureaus are often called “credit reporting agencies” and the three firms in the US providing credit information for consumers are Equifax, Experian, and TransUnion.
Credit History: a consumer’s credit history is a summary of the credit accounts that have been extended to a consumer. The credit history shows how well a consumer has re-paid these accounts in the form of listing an on-time or delinquent payment history.
Credit Report: is a summary report containing raw data about the credit history of consumers and/or businesses in the US. The credit history found on the credit report contains personal information such as name and addresses where you have lived, phone numbers and a list of who has ran your credit (credit inquiry) in the past 120 days. The report will also contain potentially negative items such as bankruptcies, liens, foreclosures and short sales, and collection accounts, if any.
Credit Score: the credit score is a mathematical 3-digit number formulated by the credit bureaus to evaluate your credit risk. The credit score is a number that is somewhere between 300 and 850 and the higher your credit score the lower a credit risk you are to a lender.
Inquiry: is defined as an item on a consumer’s credit report that occurs when a company “with a permissible purpose” (as defined by the Fair Credit Reporting Act) has requested a copy of the consumer’s credit report from the major credit bureaus. A large number of inquiries on a consumer’s credit report in a short period of time can hurt one’s credit score.
Managing ones credit is as important as managing your money, and in many cases, your credit and your money are essentially the same thing. Borrowing money gives us the financial wherewithal to buy the large ticket items that we need to run our lives. In order to buy a car or a home, most of us need to borrow the required funds to make these large purchases. And over time, we pay back these funds to the financial institution that had the confidence in us to loan us the funds. And while we are making those on-time payments we are building our credit history so we are able to borrow funds the next time we need to make a large purchase.
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