What is Credit?
Credit refers to a contractual agreement between a lender (like a bank) and a borrower (like you). The borrower is loaned some money and agrees to pay the lender back in total, typically with interest, over an agreed-upon timeframe. The most common example of this is the credit card, but the same principle holds true when borrowing money to buy a house.
When people talk about their “credit,”—like “my credit is good” or “ my credit stinks”—they’re usually referring to their credit history, which is basically a record of their credit usage. Lenders will examine credit history, along with several other factors when determining whether to lend you money for a mortgage, car loan or credit card.
Credit history should not be confused with a credit score which is a numerical representation of your credit history. The most familiar types of credit scores are the FICO score and the VantageScore which rely on algorithms to calculate how much of a credit risk a borrower will likely be and how likely someone is to pay off their loans on time. If you have a higher score, you’ll generally receive better terms on the money you borrow—like a lower interest rate or more flexible repayment terms.
