You start laying the foundation of your credit history the first time you borrow.

There’s a vast—and constantly growing—amount of information about how consumers use credit. And you can be sure that when you apply for credit, whether it’s as routine as asking for a new credit card or as significant as applying for a mortgage, potential creditors will check out your credit history.

MAKING HISTORY

The three major national credit reporting agencies—Equifax, Experian, and TransUnion—collect two types of information about you. The first is how you use credit, from how much you owe on car loans, mortgages, and credit cards to the timeliness of your monthly payments. There’s an incredible amount of data that falls into this category— about two billion items a month, which breaks down to an average of 11 items per credit user.

Credit reporting agencies also store public information about you that might influence the way lenders evaluate your creditworthiness. This can include anything from records of bankruptcies and foreclosures to court judgments that are loan related. But credit bureaus don’t gather any personal information that isn’t directly credit-related, such as how much you make, what you spend on rent or utilities, or anything you pay for in cash.

Credit bureaus make the information they’ve collected available—at a price— to creditors, banks, potential employers, landlords, and others who have a legal right to evaluate you based on your use of credit. Most information remains on your report for quite a while. Damaging activity can appear for up to seven years even if the account is closed or inactive. And bankruptcies can stay on your report for up to ten years unless the state where you live imposes a shorter limit.

WHO’S KEEPING SCORE?

Did you ever wonder why it takes a retail store or an online credit card company just a minute or two to approve your application for credit? Did you know that you may be quoted one interest rate on a car loan while the next person to apply is offered a higher—or lower—rate? These kinds of things happen because credit decisions often come down to the credit score, or FICO® score, you’re assigned by the credit source your potential creditor contacts.

All credit bureaus use a process called credit scoring, or credit modeling, to evaluate the risk you pose to a potential creditor. According to Fair, Isaac and Company, the firm that developed the software the bureaus use to do the calculation, the score depends on five main criteria:

• Your payment history, and specifically whether you pay on time
• The total amount you owe
• The length of your credit history
• The amount of new credit you have
• The types of credit you use

Creditworthy behavior in these categories works in your favor, while risky behavior works against you. And while there are general standards for the way the criteria are applied, there are no fixed rules. Credit bureaus aren’t required to explain the way they arrived at your particular score, and you shouldn’t expect them to do so. All they are required to provide are up to four reasons for the score, which the lender must tell you if you ask why your application was denied.

WHAT’S THE SCORE?

When you get a FICO credit score, you’re going for a high number. The top 20% of reports that are evaluated get scores over 780, while the lowest 34% get scores under 620.

Each lender sets its own standard for what qualifies as an acceptable score, and determines the interest rate for which you qualify based on your score. The best rates—in this case, the lowest, or prime rates—go to applicants with the highest scores. Applicants with low scores, sometimes called subprime borrowers, may be offered credit at higher rates.