Credit is a product, but unlike other products, many people don’t understand how it works. Credit bureaus collect information on consumers such as their age, bank account information, charge accounts, payment histories, outstanding mortgages, loans and debts, and court judgments. They do this by collecting information from banks, utility companies and retailers, to name a few. Based on this information, credit scores are then developed using thousands of consumer profiles.

Credit scoring is a statistically based tool used by most lenders to determine how likely people are to repay their loans and use credit. The important word is likely, since scores cannot predict with certainty how someone will act. Instead, scores provide a statistical estimate of future performance. A lender may choose to develop a custom scorecard based on their own underwriting decisions and portfolio performance. To learn more about the use of credit scores and how they are calculated, go to www.myfico.com.

Consumers can and should obtain a copy of their credit report for their records. You are entitled to receive one free credit file disclosure every 12 months from each of the nationwide consumer credit reporting companies – Equifax, Experian and TransUnion. To order a copy of your credit report, go to www.annualcreditreport.com. If information found on the report is inaccurate, inform the credit bureau about the error immediately. You should also contact the company who reported the incorrect information. The bulk of the information on a credit report is generally kept for seven years. Information on bankruptcy proceedings is kept for ten years.

If a consumer has a solid credit record and good credit score, their chances of being approved for a mortgage loan improves greatly, but that’s not the only factor. The amount of financing they can afford is also important and this eligibility is formula-driven. The formula takes into account the price of the home, fixed housing expenses, income and monthly payments on other debts.