Whether buying a pack of gum at a quickie mart, financing a car, or paying for a home or a college education, most people use some form of credit daily. Credit offers a way for us to get the things we want without having to carry cash, and it allows us to buy things we might not be able to afford all at once by paying over time.

What is credit? At the most basic level, credit is a promise that you will repay any loan according to the terms of the agreement between you and a lender. 

If a friend has ever asked if they could borrow your money, you may have asked yourself whether they could pay you back. Lenders ask themselves similar questions and have devised a system to rate the likelihood that people will repay their debts. This system consists of credit reports and credit scores.

Credit Reports 

A credit report is a financial report card that contains detailed personal and financial information dating back seven years or more. You have three credit reports assembled by the three major credit reporting bureaus - Experian, Equifax, and TransUnion. Credit report information includes:

• Social Security number and date of birth.
• Current and previous addresses.
• Current and previous employers.
• Recent credit inquiries.
• Tax or legal issues, including bankruptcies, liens, and foreclosures.
• Active loans and lines of credit, including the percentage of available credit used.
• Loan repayment history.
• Details of accounts that have been referred to a collection agency.

A credit report filled with missed payments and other harmful items will make it more challenging to get loans, and loans will be more expensive since the interest rate will be higher to offset the increased risk of default. And the penalties don't stop there - banks, insurance companies, credit card companies, utilities, landlords, and even employers can access and use your credit report to make decisions about you. About half of all employers use credit reports as a factor in making hiring decisions.

Given the pervasive use of credit reports, it's easy to understand the importance of maintaining a favorable report.

Reviewing your credit reports at least once yearly is a good idea. By doing so, you can spot errors and even identity theft. Call the credit bureau immediately if you find errors on your credit report. Under the Fair Credit Reporting Act, the bureaus have 30 days to investigate and correct any erroneous information.

Credit reporting agencies are required to offer a free report once per year through the government-mandated AnnualCreditReport.com website. The agencies may also try to sell you services as you review your report, but these extras are not required.

Many websites offer so-called "free" credit reports and scores, but most of those sites try to sign you up for a credit monitoring service. These services are unnecessary for most and often cost $150 or more annually.

Credit Scores

If your credit report is like a report card, your credit score is your overall credit grade. A credit score is a three-digit number that summarizes everything about your credit report into one number. Credit scores typically range between 300 and 850, with around 700 being average. The higher the score, the better.

The most commonly known score was created by the Fair Isaac Corporation, which is why credit scores are sometimes called FICO scores. While there are various credit score providers, scores are determined based on factors including:

• Payment history - Whether you pay your bills on time. Late payments can lower your score.
• Credit utilization - The ratio of credit you're using compared to your limit. 
• Length of credit history - How long you've had credit. The longer, the better.
• New credit - Opening new accounts can temporarily lower your average account age and score.
• Credit mix - Having different types of credit (credit cards, loans, mortgages, etc) can improve your score.

The interest rate you receive on most loans is based, to a large degree, on your credit score. Building and maintaining a solid credit history is the only way to earn a high credit score. Review our Maintaining and Improving Your Credit Score topic for more details.

While access to your credit reports is free via the AnnualCreditReport.com website, there's no government mandate to provide free credit scores.

Here's how you can check your score:

• Credit Reporting Agencies – You can purchase a score directly from Equifax, Experian, and TransUnion. 

• Credit Card Providers - Many issuers offer free credit scores as a part of their services. These are often available in the account management section of your online account. 

• Paid Services - There are many services that, for a monthly fee, provide you with access to your credit score and credit monitoring services. Be cautious and research thoroughly before paying for any services to avoid scams.

• Free Online Platforms - Websites and apps like Credit Karma, Credit Sesame, and WalletHub offer free access to your credit score. These platforms provide VantageScore, which is slightly different from the FICO score used by many lenders but can still give you a good idea of your credit standing.

• Directly from FICO - The Fair Isaac Corporation (FICO) is behind the most commonly used credit score model. You can purchase your FICO score from their website.

• Credit Unions and Banks - Some banks and credit unions offer their members or customers free credit scores.

When creating a new account to access your credit score, you must provide sensitive personal information. Always use strong, unique passwords and take advantage of the platform's additional security features. And be wary of services that claim to offer "free" scores but require credit card information. Some might enroll you in a trial service that could incur charges if not canceled.

Remember, while your credit score is a crucial part of your financial health, reviewing the full report is essential to check for errors or signs of fraud. Regularly monitoring both ensures you're informed and can take action when necessary.