Have you ever applied for a credit card? A loan? A mortgage?

If you’re reading this, you’re likely one of 80% of Americans who has consumer debt, which is money owed to lenders and creditors for things like credit cards, student loans, auto loans, and mortgages. 

So, you’ve got debt, right? That means you’ve established some form of credit. But what exactly is credit, how is it determined, and what impact does it have on your purchasing power? Let’s take a look. 

Credit

The concept of credit shouldn’t come as a surprise, but that doesn’t mean it is well understood. When you (a borrower) borrow money from a financial institution (a lender), you both agree that you will pay back the total sum—plus interest—over time. The sum, as it fluctuates with interest, is known as credit. 

But credit is also used to describe your creditworthiness.

Creditworthiness

Your creditworthiness refers to how likely (or unlikely) you are to receive credit from a financial institution. If you have a good track record of repaying your debts on time, your credit is probably considered to be good. It may even be considered excellent.

How do you know if you have good credit? That depends on your credit score.

Related: Credit card statistics in the United States 2024

Credit Score

Your credit score (also known as your FICO score) is a numerical representation of your creditworthiness. This is calculated by a data analytics company called the Fair Isaac Corporation. Here are some fast facts about credit score:

• Credit scores range from 350 to 850
• The higher the number, the better the score
• If you have a low credit score, you will get worse interest rates from your lender
• A good credit score is 740 or higher
• A bad credit score is 579 or lower 
• The average credit score in the United States was 718 in 2023
• A good credit score is important because it will keep interest rates low for large loans, such as those you might need for a home or vehicle

Credit scores are based on credit reports, which help you (and your lenders) understand your credit history. 

Credit Report

A credit report is a record of your financial history as it relates to your credit history. Your credit report includes information such as:

• Your personal info (name, address, birth date, social security number, marital status, and more)
• The names of your lenders (creditors)
• The dates your accounts were opened and/or closed
• The types of accounts (single or joint)
• The balance and credit limit of each account
• The number of late payments (and the dates they occurred)
• Personal information

Every 12 months, you can request a free credit report from one of the three major credit bureaus: To do so, click here.

Remember, you don’t have to pay to see your credit report—but you should check it every year to make sure all the information is accurate. 

Here are six free ways to view your credit report from The Balance.

Credit bureau, or credit reporting agency

A credit bureau is an organization that collects your credit history and then sells it to potential lenders or creditors, which in turn use that information to approve (or deny) your credit (or loan).

There are three major credit bureaus in the United States: Equifax, Experian, and TransUnion.

It is important to note that credit bureaus do not determine whether you get a loan. They simply present a record of your information for lenders and creditors to make that decision.

Your information may differ from one credit bureau to the next. Lenders may also report information to bureaus at different times. Because of this, it is important to obtain reports from each of the bureaus and carefully review the information for errors.

Related: How to pay off credit card debt fast

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