When it comes to understanding credit, it's easy to feel a little bit overwhelmed. There are a lot of terms that can leave you scratching your head. But since credit can have a significant impact on your finances, it's essential to understand basic credit terms and definitions.
This glossary of credit terms is here to help. Below, you'll find definitions for some common credit terms.
A credit bureau is a credit reporting agency. It collects credit information on individuals and businesses and then generates reports which are used to create credit scores. In the United States, there are three main credit bureaus: Experian, TransUnion and Equifax.
Your credit history is what's found on your credit report. Often the terms are interchangeable. It's a summary of all of your credit obligations from your past, including late payments, payment history, tax liens and more.
A credit inquiry happens when an entity, such as a credit card company or bank, checks your credit report. Soft inquiries (when you check your own score or a credit card company checks to give you a pre-approval offer) don't impact your credit. However, hard inquiries, which are pulled when you apply for a credit card, mortgage or loan, do impact your credit score. Having too many hard inquiries in a short time frame can have a negative impact.
Your credit limit is a term typically used for credit cards, but also applies to lines of credit loans. It's the total amount of credit you're given. In calculating of your credit score, a high credit limit with a low balance can help improve your score.
Your credit report is an overview of your financial history. Beyond basic information such as your address and employment history, it highlights your credit card debts, loans — such as car and mortgage notes — collection records on overdue bills and public bankruptcies or tax liens (if you have any). You can check your credit report for free once a year, which is a good idea so you can see if there are any errors you need to dispute.
Your credit score is a number, ranging from 280-850, depending on the credit bureau. It's calculated using a complex algorithm based on a variety of factors from your credit report, including how much debt you have and your payment history. While the number will vary slightly depending on the formula used, the number indicates your creditworthiness to potential lenders.
Debt to credit ratio
Your debt to credit ratio is an important factor for your credit score and your overall financial health. It's an equation that takes the total amount of credit you're using and divides it by the total amount of credit that's available to you. This is a key part of your credit score, so having a low ratio, ideally under 30%, can help improve your credit.
A FICO Score is one type of credit score that's calculated by the Fair Isaac Corporation, which is used by lenders to assess your credit risk. Your FICO Score is used by the majority of lenders today and provides a range from 300-850.
An interest rate is what a lender charges — expressed as a percentage — for the borrower to use the money loaned. For example, a mortgage lender will charge an interest rate on the loan that the borrower must pay.
A late payment is when you miss the agreed upon deadline for submitting a payment on a loan, including credit card, car or mortgage. A history of late payments can impact your credit score, and payments over 30 days late can appear on your credit report.
Having good credit is a key part of your financial well-being, so it's important to understand how it works. Check out these frequently asked questions about credit to learn more.