COMPREHENDING CREDIT
We all know how important credit is, and how it affects every part of life. Most of us associate credit with negative feelings because it prevents us from being able to get the financing we want for a car loan, or other things that are reliant on the purchase being financed. Any instance where you are relying on an institution to financially “take a chance on you”, you can be sure that your credit is likely involved. Additionally, you can also rest assured that the institution is checking your credit score. So, let’s take a quick look at what your credit score is.
Credit is essentially a social relation that forms between a creditor (lender) and a borrower. The borrower promises to repay the lender, often with interest, or risk financial or legal penalties, and depending on the lender’s faith in the borrower’s ability to repay the loan in a timely fashion, the lender assesses if there will be any stipulations attached to the loan.
This is how the lender decides if you are approved for the loan and what the terms of repayment are. The criteria each lender uses to consider your perceived trustworthiness varies from company to company. However, the one thing they all rely on is your past usage of the credit given to you, which is summarized by your credit score.
Your credit score is a 3-digit number that is used to represent a summarized depiction of your overall financial history. This simplified breakdown of your financial trustworthiness is what a lender uses when deciding the riskiness of agreeing to help you finance a purchase. Past payment history, credit use, and delinquent accounts are some of the things that are factored into figuring out your credit score. As well as many other indications of your financial history that may indicate poorly managed finances.
However, your credit score provides no context, or background information and does not specifically list all your credit bureau-reported financial history. Instead, it is more of a snapshot that gives the lender an idea of your overall financial history. To keep a universal understanding of rating of the score, the spectrum for your credit score is 300 to 850.
This score is often used by home mortgage lenders, car companies, and in some cases even employers. As a borrower, it’s always in your best interest for creditors to see you in the best light possible. Which starts with working to have a good understanding of your finances, and particularly things that are bought with a loan.
While there is no magic trick that will guarantee that your credit will improve, the key to improving your credit, is being responsible and consistent. The worst thing to do is ignore your credit. Doing so leaves you unable to enjoy the benefits of being seen as a responsible borrower, which over time could add up to tens of thousands of dollars in savings for you!
To find out more about credit check out the eBook on credit here.
