What Is Credit and How Does It Work?

Credit is a prettier word for debt. When you obtain credit you are borrowing money, or getting the right to access money (like a credit card, for example), and you hold to pay back the individual or company that loaned you that money. In these type transactions, you are the "borrower" or "debtor" and the individual or company who lent you the money is the "creditor". Part of the terms of the loan is the interest amount that you will pay for the right to utilize the creditor's money. Interest is simply money that you pay for the right to borrow money.

When you do a credit transaction, you are creating a debt that you are legally obligated to pay back. The most common types of credit transaction are loans and credit card purchases.

How make creditors make up one's mind whether or not to impart me money?

Creditors make determinations about whether or not to impart you money based, in part, upon a profile of your past credit public presentation that is kept in data files that are maintained by companies known as "Credit Reporting Agencies" (CRA's) or "Credit Bureaus" (CB's).

How do credit bureaus work?

Before credit bureaus came into existence, most creditors kept individual records on their human relationships with borrowers and did not share that information with anyone else. If you needed credit from a company that had no history of credit dealings with you then you would supply them with a listing of companies that you had already done business with and they would compose each company to happen out how you had performed under your agreement. As credit lending grew, this procedure became cumbrous and credit bureaus were formed to move as cardinal clearinghouses.

Credit bureaus accumulate information about your payment history from their member companies. Member companies are creditors who have got an understanding with the credit agency to report their credit experiences with you.

The credit agency accumulates all of this information and supplies it in a computing machine database. The agency do the information in this database available to other member companies who are considering granting you credit.

The credit agency is an fair reporting agency. It makes not do a determination whether or not to allow you credit. It only supplies the information that it have on you to the creditor who do the concluding decision.

The credit agency do money by charging the creditors for access to your information.

In the U.S., there are three major Credit Bureaus. They are TransUnion (1-800-888-4213), Equifax (1-800-685-1111), and Experian (1-800-311-4769.) There are many local and regional credit bureaus as well, but most of these obtain their information from the major credit bureaus. Not all creditors belong to all three bureaus. As a result, a creditor may see only a part of your full credit history if they make not petition reports from the three major bureaus.

Credit can assist you or ache you. It all depends on what you cognize about credit and how you utilize your credit. Learn as much as you can and your good credit will always be there for you.

What a Creditor Considers When Making a Credit Decision

Creditors look at your ability to repay the debt by analyzing your current expenses and your income. Once they have all of that information available a credit granting decision is made.

Many creditors also look at something that is called your "Credit Risk Score". One of the most popular scoring systems is known as a "FICO Score" but it is not the only scoring system. "FICO" derives its name from the company that invented the scoring process: Fair Isaac & Co.

Regardless of the name of scoring rules, Risk Scores are numerical representations that attempt to "predict" the likelihood of you being a good credit risk. In fact, credit risk scores are the sole determining factor that are used by web sites that offer you "instant credit" when you apply on line.

You should know that risk scores are not part of your official credit report and they are not part of your credit history. They are calculated by the particular lender when they receive your credit report. Not all lenders assign the same value to each scoring decision point, which means that your score will vary among lenders.

There are almost as many different scoring systems as there are lenders. Although all of them evaluate your general creditworthiness and your risk of bankruptcy, the models vary widely from there depending upon whether you are seeking a mortgage, credit card, auto loan, etc.

In some scoring systems, a high number is desirable. Others want to see a low number. Your best bet is to find out what scoring system your potential lender uses and ask them what the scoring criteria are. That's the only way that your Credit Risk Score will really mean anything to you when you see it.

Back to FICO scores for a minute. You actually have three FICO scores, which is one for each of the major credit bureaus. Since none of the major bureaus has 100% of your credit history by itself, your scores will vary among bureaus. Please refer to the section on Mortgage Reports to see how this is addressed when you are buying a home.

No credit scoring system is allowed to use non-credit data such as your race, sex, marital status, national origin, or religion when determining your score. Creditors are allowed to use your age as a scoring factor but they are not allowed to discriminate against elderly applicants.

I was told that my score was too low. How can I improve it?

As I said, different creditors use different scoring models and there is no one uniform methodology. You score can go up or down regularly based upon events in your life. Your best bet is to ask the particular creditor that denied you credit how you can improve your score with them.

All of that not withstanding, there are some generally accepted methods of helping to improve your chances of having a good score. Paying your bills on time is one-step in the right direction. If you are behind on payments then catch them up. Here are some other generally accepted tips:

Keep an eye on your total outstanding debt.
Many scoring models consider the amount of outstanding credit you have as compared to your maximum credit limits. If your credit card balances are at or close to your limit, it could lower your score.

How long have you had a credit history?
Creditors like to see a long history of satisfactory credit. Of course "long" is a relative term and that's one reason why creditors are allowed to consider your age when making a scoring decision.

How much "new" credit have you applied for?
If you have applied for "too much" credit, according to whatever arbitrary definition a creditor wants to assign, then this could lower your score as well. As time passes these accounts are no longer considered "new" and your score changes as a result. If you've handled the accounts in a satisfactory manner then your score could go up. Otherwise, it will likely go down.

How much credit do you have in total?
While you want to have a "long" credit history, you don't want to have too much open credit. This makes creditors nervous because you might be accumulating too much debt and not be able to pay them back.

Remember, your ability to repay the debt a creditor grants you is the most important factor when they look at your credit report but other things are considered too. Use the four tips above before you apply for credit to improve your chances.

Using Credit Cards To Rebuild Credit - Tips for Credit Repair

It is estimated that approximately 33 millions Americans struggle with some form of bad credit. This is about 10% of the entire US population.

One's credit history is becoming increasing important. For people struggling with bad credit, sometimes, it feels like the number is tattooed on your forehead, especially, if you've made an attempt to secure a home loan, auto loan or personal loan.

The fact is that creditors are not eager to extend a line of credit to you, if your FICO score is not above the 650 range. There are a number of reasons why your FICO score may be low - bankruptcy, too much debt, not paying your bills on time, etc.

The good news is that your credit score can be improved. The key to increasing your credit score is to maintain a line of credit and prove to your creditors that you are capable of paying your debts on time and not maxing out your credit line. These four simple steps will help you improve your credit score:

1. Get a copy of your credit report. Take advantage of the free government credit report from each of the National Consumer Credit Bureaus: Equifax, TransUnion and Equifax. This will help you to understand your starting point. It will answer the question - "how bad is my credit?"

2. Apply for a line of credit. You can apply for an unsecured credit card or a secured credit card.

3. Once you have the card, do not max out your credit card. Try not to exceed 70% of the credit card's limit. For example, if the credit card limit is $1000, you should only charge up to $700.

4. Always, pay your bills on time. This accounts for 35% of your FICO score. It's the most important factor in proving your credit-worthiness to your creditors.

Practicing these four simply principles will help you to increase your credit score in the coming months.

Using Secured Credit Cards to Establish or Rebuild Your Credit

Whether you're just starting out in the world of credit or hoping to rebuild a damaged credit report, using secured credit cards can help. However, you'll need some cash to get started.

First, let's define what secured credit cards are. They are REAL credit cards, generally Visa or MasterCard, that can be used for anything Visa or MasterCards can be used for. The difference is that they require the cardholder to deposit a certain amount of money into a checking or savings account to use as security against the card.

Secured credit cards also differ from debit cards in that secured credit cards are loans made against the money in your account, rather than simply having the money automatically deducted from your account, as is the case with debit cards. In that way, they can be a helpful tool toward either establishing or reestablishing your credit.

The interest rates on secured cards are generally higher than on standard cards, but not always. For instance, the website www.bankrate.com lists twenty-four secured credit cards, starting at 7.2% and going as high as 23.98%. Annual fees can vary from zero to $69.00, according to the site, as well.

Normally, you'll need to deposit at least $300 into a checking or savings account, which will then determine your credit limit on the card. (Each card will be different, so you'll want to do some shopping for the card that best suits your needs.)

Secured cards can allow you to begin rebuilding your creditworthiness by charging responsibly and then repaying according to your agreement. They can be a relatively quick way of either establishing or reestablishing your credit, and are worth checking out in your plan to gain control of your financial future.

Copyright © Jeanette J. Fisher

Get Healed For Life Through Christian Debt Counseling

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