What is Credit?
Credit refers to the borrowing capacity of an individual or company. What that means in plain English is that financial institutions calculate how much money you can borrow safely. That's your credit.
Taking this concept a step further, credit scoring agencies issue credit reports that assign individuals a number (from 300 to 850). That number is used by banks, credit cards and other financial businesses to assess your creditworthiness -- how likely you are to repay a loan.
A Quick History of Credit
Credit has been used throughout the world since ancient times. Credit as we know it today developed as follows:
1860s: Cooperative credit bureaus emerge in the U.S. and around the world.
1898: Founded by 2 brothers, Equifax is founded, a company that would become one of the largest credit scoring agencies.
1956: Fair Issac Corporation launches FICO scores, numbers between 300-850 that are used by lenders to assess individuals for all kinds of loans.
1997: The Fair Credit Reporting Act (FCRA) was amended to allow individuals to fix incorrect information on their credit reports and removed negative credit events after 7-10 years.
2003: The FCRA was amended once again, providing all people free access to their credit reports from the major 3 credit agencies once a year.
Why is Credit So Important?
For banks to offer a lot of credit, they needed a way to create a system to score everyone who applies for a loan. That's your credit score and it's essential to getting a good loan. That's not to say you can't qualify for a loan with poor credit. You can, but you'll probably pay higher interest rates on the loan.
What's Revolving Credit?
Some lenders will provide what's called revolving
credit or a line of credit. This is a loan that borrowers can draw down when needed and pay back when it works for them. Credit cards are a form of revolving credit, as are home equity lines of credit (HELOCs).
At the end of 2012, there was almost $870 billion in outstanding revolving credit in the U.S. and roughly 27% of all consumer debt is termed revolving credit.
Different Credit Scores
It's important to recognize that there's not one true credit score. There are three major consumer credit scoring agencies and your credit score may fluctuate up to 50 points between them.
There are four different ways your credit score is calculated:
The median credit score (50% have a higher score and 50% less) in America is a 750 FICO score .
Nevada has the lowest credit score at 660 - that's 27 points below the U.S. average.
Minnesota has the highest at 718 - which is 31 points above the U.S. average.
The spread between the lowest and highest state is 58 points.
Credit scores typically go up as people get older because they typically make more money and have longer credit histories.
Here's how the average credit scores break out by age :
The Advantages to Having Good Credit
One of the major advantages to having good credit is the ability to borrow money at good rates. Lenders will be more likely to lend at do so at good rates if you have good credit.
It's also easier to qualify for new credit cards when you have good credit. With good credit scores, you'll also have an easier time qualifying for higher balance limits. You'll be able to borrow more money at better rates when you have good credit.