The Credit Report

Credit rating agencies, also called credit bureaus or consumer reporting agencies, are for-profit companies that maintain credit information to produce credit reports and calculate credit scores for nearly every adult in the United States. There are three main agencies in the United States that dominate the market: TransUnion, Equifax, and Experion.

Credit bureaus collect information about consumers’ financial activity, compile that information into a report, calculate a credit score, and then sell that information to banks, mortgage lenders, department stores, car financing companies, employers, and any other entity who is enquiring about an applicant’s credit background. Although credit reporting agencies collect consumer credit data, they do not make any credit decisions. Rather, creditors use the credit reports and credit scores created by the credit bureaus, to supplement information provided by applicants, to make decisions about granting credit, approving and pricing insurance, renting or mortgage lending for housing, hiring, issuing credit cards, and other purposes.

There are many components to personal credit and a person’s financial life, and these are captured in their credit report. A person’s credit file is important because it determines if they can borrow money and if so, what they will have to pay for it and how quickly they will need to repay it. This means the monthly mortgage payment a person makes is directly related to their credit score, as is their monthly credit card payment, and their auto insurance premium, and other loans and credit payments.

A person’s credit profile is an indicator to lenders, also called creditors, of how high a risk they are in terms of the likelihood that they will repay the money they borrow within the terms of the agreement. Meaning, will they pay on time. If an installment loan requires a monthly payment, but the borrower only pays every other month, that hurts their credit profile, even if at the end of the year they paid the same amount they would have paid if they had paid on time. What’s important is paying on time and the credit report gives lenders a clue about whether or not the applicant is likely to live up to the terms of the agreement. A person’s credit history demonstrates their behavior. Therefore, lenders use credit report data to learn about applicants financial lives and assess their creditworthiness in combination with other factors.

In combination with credit history data, lenders often use what is called “The Three Cs of Credit” when evaluating the creditworthiness of applicants. The three Cs are: character, capacity, and collateral (some use the word capital instead of collateral.)

About Bad Credit

There is a myth that people with bad credit are poor; unemployed or under-employed; struggle to meet the basic necessities of life, such as paying for food, shelter, and medical care. These mythical people can’t manage money, don’t understand the basic concepts of credit, or just don’t care about paying their financial obligations in a timely manner.

In all likelihood, many people with bad credit do fit that profile, but it’s equally likely that many do not. On paper, people who struggle with personal finances won’t all look the same. Some consumers with financial management issues have steady employment with high salaries, drive nice cars, live in beautiful homes, own boats, enjoy expensive vacations, but they, too, have bad credit. The truth is anyone can have bad credit. Even millionaires have money troubles; earning money and managing it wisely are two very different skills.

On one end of the spectrum are people with bad credit who don’t have enough money to make it from paycheck to paycheck. These consumers believe they have no alternative but to use credit to supplement their income. In doing so, they can get stuck in a vicious cycle of borrowing money, over extending themselves, continuously struggling just to payback their loans. There are many credit products with exorbitant fees and high interest rates that make repayment extremely difficult and expensive. Or, many consumers can become victims of scams or other too-good-to-be-true offers in desperate attempts to solve their money troubles, only to be taken advantage of by unscrupulous companies that target this vulnerable sector of the population.

On the other end of the spectrum are people who buy into the American consumer dream to have more, get more, buy, buy, and buy. And if they can’t afford it, they find a way to finance it, or they charge it on their credit card. In an ever increasing stack of bills and financial obligations, many people find themselves working to pay off their debt, rather than enjoying life, putting money aside for pleasurable activities, starting a college fund for their children, or saving for retirement.

Consumers in both of these scenarios find themselves in the same place: they have bad credit loans. In both situations, people develop the same problem, their finances spin out of control and they suffer, both financial and emotionally. There can be few greater stresses in life than monetary woes; not having enough money to meet life’s financial obligations can be extremely stressful. People can lose their homes, relationships suffer, and families can break apart all due to poor money management. Poor financial management over time leads to a bad credit history and a low credit score, making an individual a poor credit risk.

There is a positive in all of this: anyone can repair their credit. It does take time, energy, and self-discipline, but it can be done. In order to do that, it’s important to gain a better understanding of various aspects of personal finances. A savvy consumer can make better choices. However, the first step for an individual to take toward gaining control of personal finances is to know what’s in their own credit profile. That can be done by reviewing their credit report and obtaining their credit score.

A Consumer's Guide to Credit Scores

The importance of personal financial health is often underestimated, and that can be a costly mistake. A person’s financial profile affects just about every aspect of their life, including: obtaining employment; renting or purchasing real estate; participating in volunteer work; obtaining student loans; purchasing automobile insurance; and, the most obvious, being granted approval for any form of credit. Not only does a consumer’s credit status affect their ability to obtain goods and services, it also determines the price of those products.

Simply stated, people with “good” to “excellent” credit pay less for the same goods and services as do people with “bad” credit. Therefore, it’s worthwhile to learn about personal credit, including what constitutes bad and good credit; how people get into trouble and develop bad credit; what tools are available to help with finances when someone has bad credit; and how to turn bad credit into good credit.