Many of us don’t fully understand credit and how it works despite using it in money related transactions every day. We all have ‘credit ratings’ and ‘credit history’, and understanding these can help us to get cheaper loans and to achieve the things we want to achieve. By knowing how credit works this can help us to be better able to improve our standing in the eyes of the financial institutions and to avoid losing money unnecessarily.

So what is credit? What is a credit history? In terms of credit cards credit is simply a loan. The amount you are credited is the amount you can spend, while your ‘credit rating’ reflects how you handle that loan and whether or not you should be trusted financially.

Each time you take out a loan you see, or use credit cards, a financial institution is investing in you. They give you money, but they do so with the knowledge that you will pay it back with interest meaning that they earn more money as a result of the transaction. However if you struggle and can’t pay your loans back – meaning they get the money late or even not at all – then this means that they lose out on that investment just as though they had invested in a stock that went down hill.

Credit ratings then are designed in order to help the credit companies to make more informed decisions on who they lend money to. By agreeing to hold records on how borrowers behave with their money and to make these available to other lenders and banks, they are engaging in a mutually efficient process that allows a company to see at a glance whether you have managed to be true to your previous financial commitments. This then can act as a warning or as a comfort depending on that credit rating.