We know that credit scores are important and that creditors take into account your credit history, the types of credit you use and how you’ve paid it back in order to calculate these.
But what exactly is credit?
Credit is an agreement between a lender and a borrower, through which the lender or creditor allows the borrower to purchase goods or services before having physically paid for them. This is offered with the agreement and understanding that the borrower will pay back the credit used within a given time frame, and often with interest.
Common ways of using credit to buy things include; purchasing goods or services with a credit card, taking out a student loan, or taking out a mortgage. All of these allow you to purchase and use immediately, or rather for the bank or creditor to purchase it for you, and then you can pay them back by the agreed upon date later.
When acquiring credit, a credit limit is set by the lender. This is the maximum amount you can borrow for that particular line of credit. For example, if you are applying for a credit card, a limit will be imposed on the maximum outstanding balance you can reach on that card. The credit limit will be based on your credit score and income.
To decide whether you are someone who can be trusted to pay back this credit, companies will calculate and use a credit score, a figure between 0-999, which tells them how responsible and credit-worthy you are according to their standards and requirements.
Credit scoring models take into account a number of different factors to calculate a score and this differs between companies, but generally it will analyse your credit history and payment history to see how you have handled and repaid credit in the past.
Has our credit score series has made you curious to know more about your credit score?
You can access a detailed copy of your own credit report through CheckMyFile.*
*Where you access the services of CheckMyFile through the link above, Lendwise will receive a small affiliate fee.