Credit bureaus are private companies that collect and report information from creditors, public records, and various institutions. There are over one thousand different credit bureaus; the three major credit bureaus are Equifax, Experian, and TransUnion.

Credit reports are files of information that credit bureaus compile about specific individuals. Most individuals who have any type of credit (credit cards, checking accounts, loans, etc.) have a credit report.

The information on your credit report is very detailed. It includes personal demographics, such as your age, social security number, previous addresses, and employment history. The report also includes information about your credit history, including a list of any inquiries made about your credit in the last two years. Factors that determine your credit worthiness include your annual income, how long you have lived at your current residence, how long you have been employed at your current job, and how many bank accounts and credit cards you have. Other factors that determine your credit worthiness include your employment history and credit history.

Although the information gathered by the credit bureaus is about you, it may not always be correct. It is estimated that 70 percent of Americans have at least one negative remark on their credit reports, and almost half of all credit reports contain incorrect or obsolete information.

You have specific rights related to your credit reports. If you are ever denied a line of credit, you can request a free copy of your credit report from each of the credit bureaus. If you would like to review your credit report, you can request a free copy of your credit report once a year from each of the three major credit reporting agencies by going to www.Annualcreditreport.com and filling out several forms.

You should review your credit report from each credit bureau once a year to make sure there are no mistakes on your report; even simple mistakes can result in a lower credit score which may prevent you from getting a mortgage or a consumer loan; these mistakes may even increase the cost of your auto insurance.

When you are reviewing your credit report, look for open lines of credit that you were not aware you had opened and other indications that someone may be committing fraud by using your information. If you think there are mistakes on your credit report, you need to have them investigated. If an investigation does not clear up a mark on your credit report, but you still disagree with it, you can add a personal statement of up to one hundred words to your credit report explaining what happened with a specific creditor. When you apply for credit, potential lenders can see your explanation of what happened and consider it when they make their lending decisions.

Credit evaluation is the process potential creditors use to determine whether or not an individual deserves to be given credit. This evaluation is based on an analysis of specific financial information from various sources.

A credit score is the result from that credit evaluation. It is like a grade point average (GPA) when you were in school.  

Financial institutions developed credit scores as a way of determining which borrowers are most likely to repay their loans. For students, a GPA is based on grades, while, for borrowers a credit score is based on factors such as credit history, length of credit, repayment history, and types of credit owed.

Your credit score takes into account specific factors surrounding your debt and debt habits. You are assigned a single score that lending institutions use to base their decisions on whether you qualify for credit. Your credit score also determines what interest rate you will pay on the credit that an institution offers you. Generally, the higher your credit score, the lower the interest rate you will have to pay.

One of the most important investments that may be affected by your credit score is a loan for a new home purchase. Your credit score can have a significant impact on whether or not you get this type of loan: nearly 75 percent of all mortgage loans are sorted according to credit scores. Your credit score may also affect the cost of your insurance. For these and many other reasons, understanding credit and maintaining a high credit score are important to your overall financial health.

Lenders base your interest rate on your credit score. The higher your credit score, the lower the interest rate that lenders will offer. Research by E-loan showed the following statistics on how credit scores (FICO) affected what interest rate consumers paid on loans:

Credit scores above 760 paid 4.66 percent.

Credit scores from 700 to 759 paid 4.88 percent.

Credit scores from 660 to 699 paid 5.05 percent.

Credit scores from 620 to 659 paid 5.27 percent.

Credit scores from 580 to 619 paid 5.70 percent.

Credit scores from 500 to 579 paid 6.24 percent.

(Source: http://Myfico.com/6May2010)

For a $300,000, thirty-year loan with monthly payments, the difference in how much someone with a credit score of 760 (4.66 percent) paid in interest compared with how much someone with a credit score between 500 and 579 (6.24 percent) paid was significant; there was an increase in interest payments over the life of the loan of $107,342 on a $300,000 loan. There is a direct correlation between the interest rate you pay and your credit score (source: http://www.Myfico.com/ 30 Jan 2008).