Understanding Credit: How Credit is Tracked
- By Budgeting Help
- Published 04/11/2007
- Credit
- Unrated
How Credit is Tracked
As shown in the previous articles, obtaining credit rests on several factors including past performance meeting debt, payment and credit obligations. Your past and current creditors keep track of your account and payment history in numerous ways, and future creditors have the opportunity to review this information while deciding whether or not to approve your car loan, provide your cellular phone service, or give you a lower interest rate on your mortgage.
There are two ways creditors can track your credit performance: through their own internal system, or by reporting to Credit Reporting Agencies (CRAs). Changes to information reported to CRAs can have substantial effects on your credit report and credit score, which will determine future credit opportunities and their terms.
All creditors whether credit card companies, mortgage lenders, vehicle lenders, or even the credit union that has your personal loan, keep track of your payment history. It is from developing good internal payment history where you may obtain certain benefits of being a cardholder or a member of a credit union. For instance, if you maintain on-time payment history throughout the duration of your car loan with your local bank, they may offer you a credit card with better interest rates and terms than what you are typically offered through direct marketing. Not all creditors report your payment history to CRAs.
However, most creditors do report to CRAs (please see “Types of Credit” for more information). In order to develop the type of creditworthiness and credit score that potential creditors will find desirable (and thereby extend credit in greater amounts with better terms and lower interest rates), CRAs keep track of your credit history and make it available to consumers and creditors in the course of applying for credit.
Keep in mind that payment history is only one factor among many that are used to calculate a credit score. The length of credit history, amounts owed, new credit, and types of credit used are all essential in determining what your credit score is. Most lenders today use a credit score called FICO that is based on a proprietary algorithm owned and maintained by the Fair Isaac Corporation. Even it is not a perfect scoring system (it will typically exclude installment loans) the FICO score has become the industry standard. Your FICO score will typically vary between CRAs.
The three major CRAs----Equifax, TransUnion, and Experian, are often viewed negatively by consumers due to their inaccessibility and reporting standards that are unaligned and riddled with mistakes, all of which also have an effect on your ability to obtain credit. However, they have become part of the American credit system, and having a better understanding of CRAs, credit reports and credit scoring will only help you develop and maintain good credit. Additionally, there are many methods of resolving the mistakes made on your credit report when the credit reporting mistakes are legitimately the fault of a CRA or creditor and not based on credit mismanagement. Though time consuming and frustrating, correcting these issues will benefit your creditworthiness (see “Resolving Errors on your Credit Report”). The government now allows all consumers to obtain a free copy of their credit report once a year from Experian, Transunion, and Equifax. These reports can be obtained online at www.annualcreditreport.com.
There are two ways creditors can track your credit performance: through their own internal system, or by reporting to Credit Reporting Agencies (CRAs). Changes to information reported to CRAs can have substantial effects on your credit report and credit score, which will determine future credit opportunities and their terms.
All creditors whether credit card companies, mortgage lenders, vehicle lenders, or even the credit union that has your personal loan, keep track of your payment history. It is from developing good internal payment history where you may obtain certain benefits of being a cardholder or a member of a credit union. For instance, if you maintain on-time payment history throughout the duration of your car loan with your local bank, they may offer you a credit card with better interest rates and terms than what you are typically offered through direct marketing. Not all creditors report your payment history to CRAs.
However, most creditors do report to CRAs (please see “Types of Credit” for more information). In order to develop the type of creditworthiness and credit score that potential creditors will find desirable (and thereby extend credit in greater amounts with better terms and lower interest rates), CRAs keep track of your credit history and make it available to consumers and creditors in the course of applying for credit.
Keep in mind that payment history is only one factor among many that are used to calculate a credit score. The length of credit history, amounts owed, new credit, and types of credit used are all essential in determining what your credit score is. Most lenders today use a credit score called FICO that is based on a proprietary algorithm owned and maintained by the Fair Isaac Corporation. Even it is not a perfect scoring system (it will typically exclude installment loans) the FICO score has become the industry standard. Your FICO score will typically vary between CRAs.
The three major CRAs----Equifax, TransUnion, and Experian, are often viewed negatively by consumers due to their inaccessibility and reporting standards that are unaligned and riddled with mistakes, all of which also have an effect on your ability to obtain credit. However, they have become part of the American credit system, and having a better understanding of CRAs, credit reports and credit scoring will only help you develop and maintain good credit. Additionally, there are many methods of resolving the mistakes made on your credit report when the credit reporting mistakes are legitimately the fault of a CRA or creditor and not based on credit mismanagement. Though time consuming and frustrating, correcting these issues will benefit your creditworthiness (see “Resolving Errors on your Credit Report”). The government now allows all consumers to obtain a free copy of their credit report once a year from Experian, Transunion, and Equifax. These reports can be obtained online at www.annualcreditreport.com.