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What is credit, and why do you need it?

March 05, 2021

Couple laughing

What is credit, and why do you need it?

March 05, 2021


In the U.S., establishing good credit is an important factor in creating a healthy financial life. To help you achieve good credit, we’re taking a closer look at credit reports, credit scores, and how you can set yourself up for success.

What is credit?

In a broad sense, credit is the concept of receiving something of value now with the promise to repay it in the future. Lenders, like banks and credit unions, extend credit to consumers through tools like credit cards and loans for homes, automobiles, higher education, and more. The better your credit, the more likely you are to be able to take out loans when you need them.

Credit reports

A credit report is a detailed list of your financial information, including your bill payment history, loans, and debt. It shows where you work, live, and whether you’ve been sued, arrested, or filed for bankruptcy. Your credit report helps lenders decide if they should give you credit or allow you to take out a loan, and the information in your credit report is used to generate your credit score.

Credit scores

Your credit score is a numerical representation of your creditworthiness, and in a way, it’s your financial reputation. It shows lenders how likely you are to pay back a loan based on your payment history. In the U.S., your credit score is one of the most influential factors in determining your eligibility to rent an apartment, take out student loans, and purchase a car or home. The two main types of credit scoring systems used by a majority of lenders are FICO® Score and VantageScore®.

What is a good credit score?

The most recent versions of both FICO Score and VantageScore range from 300 to 850 points. Generally, the higher the number, the better the score, and the more likely creditors are to lend to you. According to FICO, most lenders consider anything above 670 a good score.

Why are my scores different?

Not all lenders report the same information at the same time, so your score may look different depending on when and where you check.

How is my credit score calculated?

While FICO Score and VantageScore use different strategies to evaluate your credit score, they each consider these components:

Payment history

Payment history shows how you’ve paid your accounts, including whether they’ve been paid on-time and in full. This section can also include the amount still owed on past-due accounts, the number of past-due items on your credit report, bankruptcies, and more.

Credit usage

Credit usage is the total amount you owe on your credit accounts. This includes your credit utilization rate, which is the amount you currently owe divided by your credit limit. Simply put, if you are using a large portion of your available credit, you are more likely to be overextended and more likely to miss payments. To show lenders you’re reliable, try to keep your credit utilization rate low.

Length of credit history

This section takes into consideration the age of your oldest account, newest account, and the average age of all of your accounts. Generally, longer lengths of credit history lead to higher scores, so keep your accounts open whenever possible.

Types of credit

This category considers the types of credit accounts you have experience with, including credit cards, retail accounts, mortgage loans, and more. Consumers with higher scores tend to have experience with a variety of credit accounts.

Recent activity

Recent activity includes credit inquiries and new accounts you’ve opened. While this is one of the least influential factors, it’s best to avoid opening too many accounts within a short amount of time because it can be a concern for creditors.

Improving your credit

Keep these tactics in mind to gradually improve your credit over time.

Pay your bills on time

This establishes a positive payment history, which is the most influential category in both credit scoring models.

Work on paying off debt

Paying off debt will decrease your amount owed, increase available credit, and show lenders that you have a history of paying off your loans.

Keep your credit card balances low

Having a low credit utilization rate shows lenders that you’re using less of your available credit, which generally indicates you are less of a risk to lend to. 

Keep older credit card accounts open

Not only does this contribute to your overall credit limit, which allows you to show a lower credit utilization rate, it also impacts credit age, another major factor in both scoring models. 

Monitor your credit report

It’s important to check your credit report at least once per year to ensure there are no errors or fraudulent activities present. Under the Fair Credit Reporting Act, you are entitled to a free yearly report. You can access yours at, the only authorized website for your annual free credit report.

The importance of good credit

Establishing good credit will make it easier to take out loans for life’s big milestones. Educating yourself is the first step to a positive relationship with credit and, by now, you’re well on your way. If you implement these tips and keep what you’ve learned in mind, you should start to see improvements over time.

At Wintrust, we offer a number of tools, including deposit, loan, and credit card solutions, to help you get your credit back on track. To learn more, visit our Credit Building & Repair page.

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