Accounting and Finance Foundations

Unit 10

Accounting and Finance Foundations Unit 10: Credit 753

Credit

Chapter 22

Lesson 22.2 Credit Regulations

Credit is protected by many laws that affect both creditors and debtors.

Creditors want to make sure the person or business wanting credit is willing

and able to pay back the loan. Debtors want to know that they can trust their

identity and credit with creditors. One form of protection is the credit report.

In addition to indicating the individual’s or business’s credit score or rating,

this report also shows the individual’s or business’s debt, how often credit

is used, and whether or not bills are paid on time. As a consumer, you have

access to your credit report through three major credit reporting agencies:

Equifax, Experian, and Trans Union.

When applying to receive credit from creditors, they may ask for your permission to contact Equifax,

Experian, and Trans Union to access your credit report. Potential lenders then examine the report and use

it as a tool to decide whether or not to grant credit. In addition to learning a lot about your character and

capacity, creditors can use your credit report to find public records associated with your name. Public

records include information reported by the local, state, and federal government about legal matters as-

sociated with your name. These legal matters might include bankruptcies, tax liens, court records, and/or

monetary judgments.

Keep in mind that whenever a potential lender requests

your credit report, it is making a hard inquiry into

your credit. Even if you initiated the credit application

process with the lender, its hard inquiry has a negative

impact on your credit score. Each time that lenders,

employers, landlords, financial institutions, or other

businesses (even phone and cable companies) make

a hard inquiry into your credit, your score is likely to

drop about five points. In some cases, such as when

you are applying for an auto, home, or business loan

that you really need, losing points is worth it if it

results in being approved for the loan. But, you should be cautious about how often you apply for credit,

since doing so can hurt your credit score. (On the other hand, soft inquiries, such as your own inquiry into

your credit, do not hurt or change your score.)

Student Guide