How Consumer Credit Works

Almost every area of your financial life is tied to consumer credit in some way. Credit bureaus, credit reports and credit scores all play a vital role in your financial situation and can impact how much you pay for many items. Understanding how consumer credit works can help you gain control of your finances and start saving more money.

Credit Bureaus

The credit bureaus play an integral part in consumer credit. When you open an account with a creditor, all of the information about that account is reported to credit bureaus. Experian, TransUnion and Equifax are the three major credit bureaus in the United States. Most creditors, such as credit card companies, mortgage lenders and auto lenders, report to the three major credit bureaus. When you make a payment, open a new account or pay off an account, this information is given to the credit bureaus.

Credit Report

Credit bureaus put the information they get into a credit report. Each individual has her own credit report. A credit report is tied to your Social Security number and your name, so every account you have can be linked to it. Accounts, judgments and other information stays on your credit report for many years. For example, a judgment can stay on your credit report for seven years.

Credit Scores

A three-digit number, your credit score represents all of the information in your credit report. It is calculated using a formula developed by the Fair Isaac Corporation, or FICO. Also called your FICO score, this number affects lending decisions, and it also determines what type of interest rate you can get when borrowing money.

Changing Credit

Your credit score is always changing. Every time you make a payment or engage in some other type of action, your score is updated. Creditors continually report to the credit bureaus every time you do something. When this happens, your credit score is immediately updated by the credit bureaus. If you have a low credit score, you can turn things around and build up your credit score over a certain amount of time.