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Credit Basics

Credit can be a valuable tool to help you meet your goals. That’s why it’s important to understand what credit is, how to manage it, and what you stand to gain from establishing and maintaining good credit.

  • What is credit?
    Credit is your ability to obtain the goods or services you want now by promising to pay for them later. Your ability to obtain credit is based on your credit history.
  • How does credit work?
    Lenders like Wells Fargo and other financial institutions extend credit by lending you money at an agreed-upon amount, rate and payment term. When you borrow, you begin to establish a credit history: this is a record of your credit accounts, your payment history, and the details of how you manage each account.
  • What are the benefits of good credit?
    Good credit can give you access to more borrowing options, such as paying for a car, a home, or an education at the best possible interest rate or terms. In addition, employers, insurance companies, landlords, cell phone providers, and more can use your credit history when they make decisions about you.

Good credit takes time to establish. Explore strategies for building credit so you can lay a solid foundation for your credit history.  

Credit bureaus, reports, and scores

Your credit activity, or what you borrow and when you repay it, make up your credit history. Credit bureaus collect this information from various sources and issue reports based on your borrowing and bill-paying habits.

Your credit activity is monitored by credit bureaus. There are 3 different national bureaus: Equifax, Experian, and TransUnion. As each bureau operates independently, you’ll have a unique credit report at each one. All of this information contributes to your credit score, which is like a grade for your credit report.

There’s no single accepted credit report or standard for credit scores. Lenders may review all three bureaus’ information and create their own standards when determining if they will offer you credit.

Wells Fargo has established the following standards for credit scores:

  • Excellent: 760+: You should generally be able to qualify for the best rates, depending on your debt and income levels and the amount of equity you have in any collateral.
  • Good: 700-759: You should typically be able to qualify for credit, depending on your debt and income levels and collateral value (but you may not get the best rates).
  • Fair: 621-699: You may have more difficulty obtaining credit, and will likely pay higher rates for it.
  • Poor: 620 and below: You may have difficulty obtaining unsecured credit.
  • No credit score: Typically, you have not built up enough of a credit file at the credit bureau to calculate your score, or your credit file has not had activity for some time.

Ensure your credit accuracy by monitoring and managing your credit reports from each of the three national credit bureaus. Keep in mind that you can access an annual credit report for free with information pulled from all three credit bureaus, at

Understand the difference between credit scores and credit reports

Good credit saves you money

Good credit can impact interest rates, the better your credit score, the better your interest rate options may be.Your credit score can impact interest rates, your terms, or the amount of your loan. The better your credit score, the more money you may save on interest. 

For example, with a good credit score and a loan of $15,000 at 10%, you would pay $391 per month.

How lenders make credit decisions

Lenders use your credit score, along with other factors, when they decide whether or not to extend you credit. Make sure to stay on top of different lender requirements and maintain a solid credit history.

Wells Fargo looks at the following factors when reviewing any new credit application along with your credit report and credit score:

  • Your debt-to-income ratio, to assess whether you can manage monthly payments
  • Your collateral, if you’re applying for a secured loan
  • Your savings, investments, and other assets
  • How you’re going to use the loan

What affects your credit report

By taking responsibility for your credit history, you’re taking an important step toward building good credit. Here are a few actions that can negatively impact your credit report and lower your ability to qualify for new credit:

  • Paying late or missing a payment
  • Exceeding or maxing out your credit card
  • Collections, loan default, bankruptcy, or foreclosure
  • Legal judgments and tax liens

Debt-to-income (DTI) ratio

Your debt-to-income ratio is the percentage of your monthly income that goes toward paying down debts and other monthly expenses like rent.