What is Credit? How Does it Work?

Whether you're interested in opening a new account, getting a car loan, or applying for a credit card, your credit rating determines your eligibility, and the interest rate you'll pay. Therefore, it is essential that you both understand and protect your credit rating.


This guide:

    • Explains the importance of a good credit rating

    • Lists all of the information contained in your credit report

    • Shows you how to spot errors in your credit file and how to fix them

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Why a good credit rating is important

A good credit rating ensures your ability to get a good interest rate on loans, credit cards, insurance; it can be the difference in getting an apartment in which you'll actually want to live, or a job at which you'll actually want to work.

Are these good enough reasons to maintain a good credit rating?

Qualifying for competitive rates can mean saving hundreds, even thousands of dollars in finance charges and interest, every year.

Your credit report and credit score

When people refer to your credit rating they can mean one of two things: your credit score, or the contents of your credit report. Your credit report is a statement detailing your credit history. Your credit score is a number which assigns a value to the information in your credit report. Yes, to big lenders, we are all just numbers.

Your credit report includes:

    • credit card and loan payment history, including late payments and charge-offs
    • public financial records and other public records, like bankruptcy, foreclosure, etc.
    • credit inquiries


Your credit score, on the other hand, is a number. It is calculated by assessing the following information in your credit report:

    • your personal payment history
    • the amount of money you owe now
    • the length of your credit history
    • whether you have any new credit or debt
    • the mix of credit types you use

Your credit score gives a lender an "at a glance" overview of how you manage your credit. To learn more about credit scores, check out our guide to FICO credit scores.

To see your credit score instantly, visit Equifax


Next: A more detailed look at the information in your credit report.