Credit is referred to daily in America. Unfortunately, most people are not really clear with what exactly credit is, how it works, or how it is viewed. I will help shed some light upon credit and give you the inside scoop on what we know. This should help you to make the best decisions possible regarding your financial future. Let’s start by getting some housekeeping out of the way. Here are definitions to some terms that are used by lenders (credit unions, banks, finance companies) to discuss credit: FICO – An acronym for “Fair Isaac Corporation.” Fair Isaac is a research company that has developed the credit score formula used by most lenders in the U.S. Trade Line – Lender-speak for an individual account that shows up on your credit report, i.e. credit card, mortgage, car loan, store credit card Underwriting – The process a lender goes through to determine whether or not to approve a loan/credit card request. This includes many factors, including credit score. FICO Score Basics Ok, so how does a lender get your credit score? From one of the three national credit bureaus: Equifax, Experian, and Trans Union. There are many different scores available, but most lenders use the following: 1. Equifax – Beacon 2. Experian – FICO 3. Trans Union – Empirica The name of the score (Beacon, FICO, and Empirica) represents a behind the scenes “formula” that calculates a 3 digit score.  (Deep breath time)  Each formula is a little different, but mostly the same, and will cause your score to be a little different for each bureau. Credit scores range from 300-850 and tell a lender the likelihood of a person to go 90+ days past due over the next two years. The higher the score, the lower the risk. Supposedly. A lot of banks fall in love with a score and automated loan decisions are based primarily on credt score. When you apply for a credit card in a store or online and are told quickly if you are approved, pending, or denied, they are really just looking at your credit score and determining if you are a good risk. So, why should you care what your score is? There are 4 main reasons: 1. A good credit score signigicantly increases your chance of being approved for a loan or credit card. If you cannot be approved by a bank or credit union, your options get real ugly, real fast. 2. Most lenders use a credit score to determine the rate to charge. If you are lower risk (have a higher credit score) you will pay a lower rate. 3. Insurance companies are using credit scores to evaluate the risk you represent and will set premiums accordingly. They have determined through studies that people with higher credit scores are more likely to take care of their homes and vehicles. 4. Most employers do a credit check before hiring a new employee. A good job can be lost over a lower score. In part 2, I will give some detail on what impacts your credit score and what you can do to improve it. Please submit any questions you have regarding credit in the comments below and I will be sure to address those questions as well. Keep on keeping on.

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