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What is Credit?

Regardless of your particular situation, a day may come when you need to answer the question "What Is Credit?" This may seem like a simple question, but often, it's more complicated than you may realize.

What Is Credit?: Credit Explained

Credit refers to money provided by a lender so that the people or organization borrowing the money can make a purchase now even if they cannot afford to pay for it right away. Credit may also refer to goods or services provided with the understanding that the recipient will pay the value of those items at a later time. When a lender extends credit, there may be a grace period, but at the conclusion of that period, you will be required to pay back the amount of credit extended. You generally will not have to pay off your credit all at once. Credit terms are usually monthly, with a portion of the loan being paid back each month.

What Is Credit?: How Lenders Make Money

So why do companies extend credit? Lenders make money by charging interest on whatever loan they provide. When you take the loan, you agree to pay back the credit amount plus the interest. That interest, in conjunction with any fees the lender may charge, is how most lending organizations make money.

What Is Credit?: How Are Interest Rates Determined?

Interest rates are set based on the risk level of the type of loan extended against the risk level of the person receiving the loan. What this means is that the credit lender weighs the amount of money that they can make if you make all your credit payments against the amount they stand to lose if you default on your credit loan. The higher your risk, the higher your interest rates may be. Effectively, you are paying for the members of your risk group who end up defaulting.

What Is Credit? How Do Lenders Know Your Risk Group?

Lenders determine your risk group by looking at your credit score and credit report. This is why it is important for you to establish credit as early as possible. If your record shows that you have a history of making credit payments on time, this will be reflected in your credit score, and you will be more likely to have credit extended to you at favorable rates. The higher your credit score, the better loans you may be able to get, with respect to amount of credit and interest.

Managing Your Credit

When learning ways to manage your credit and achieve a good credit score, the first thing to know is that there are three national credit reporting agencies that most lenders look at when trying to decide whether or not to extend credit to you. They are Experian, Equifax, and TransUnion. Although all of these companies report on your credit, the reports they come up with may vary because they have different ways of collecting your credit information.

As such, you'll want to review reports from all three credit reporting agencies regularly throughout the year, since this can help you find any inaccuracies that could harm your credit profile or indicate identity theft. Once you've reviewed your latest credit report and scores, you'll have a better idea of how lenders may view you and your likelihood of receiving favorable terms on your loan.

How PrivacyGuard Helps You Manage Your Credit

As a PrivacyGuard customer, you can receive your latest triple-bureau credit report and CreditXpert Credit Scores™ every month, so you'll have ongoing updates to your credit information throughout the year. See details. You'll also enjoy daily credit monitoring, which alerts you of certain changes to your credit report that could impact your credit score. See details. With all these tools and information at your fingertips, PrivacyGuard can make it easier for you to make the most of your credit. See details.

Getting Started with PrivacyGuard

Best of all, you can receive your triple-bureau credit report and scores - as well as access to all of PrivacyGuard's other tools - just for trying PrivacyGuard. Sign up now, and experience all the advantages PrivacyGuard has to offer.