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What is "credit" and what does it mean?
Webster's Dictionary says "credit" derives from the Latin creditum, meaning something entrusted to another, such as a loan, or reliance on the truth or reality of something. It is also related to the Latin creditus or credere, meaning to believe or entrust.
Other sources define "credit" as a privilege granted for the purpose of extending time to make payment on a debt (e.g., through a loan or use of a credit card or similar device), and also as referring to the "financial worthiness" of a borrower. In other words, the history of whether a borrower has met financial obligations on time in the past.
Obviously "credit" can also refer to credit for a favor, credit for a movie role, credit for taking a course in school, etc. There are many definitions, but the one of interest to us here has to do with one's ""credit worthiness": one who is creditworthy is financially sound enough (via reputation or income or assets) to justify the extension of credit (i.e. a loan of some kind)
"How good is your credit" thus refers to numerous things that basically define whether you can be counted on to do what you promise, especially in a financial sense. What is your reputation? Are you believable and trustworthy? To the financial world, credit is the opportunity to get something now by promising to pay for it later.
Reputation is the key element here, and many people do not realize this. It can take many years to build up a reputation for good credit (or honesty), but it only takes a short time to lose that reputation. Once lost, it can be very difficult to reestablish good credit.
Credit can be your friend or foe
Credit can be a valuable friend, but it can also be a nasty foe. It all depends on how you use it and how well you live up to your end of the bargain. That is, do you honor the credit commitments you make, or do you not.
Unfortunately, credit is widely misunderstood and, perhaps even more to the point, widely misused. Opening up numerous lines of credit (e.g., credit cards), maxing out lines of credit, making payments late (or skipping them), and defaulting on loans or other payments when due can lead to devastating results. These results can cut off your future options for borrowing, increase your cost of borrowing, and hurt in other seemingly unrelated ways (e.g., loss of a job, loss of job opportunities, or even loss of a marriage to name a few).
Types of credit
There are two general types of "credit" or "loans":
How do creditors determine your credit?
Lenders generally look at the following items in evaluating whether or not to extend you new credit.
What is your credit history?
The fastest way for a creditor to evaluate your reputation and character is by looking at your credit history. So a number of years ago, several independent "agencies" or companies decided to make a business out of collecting, organizing and reporting on the credit history of essentially all American consumers.
The most well known of these credit-reporting companies are TransUnion, Experian and Equifax. These three companies collect all the credit-related data they can get their hands on, organize it by individual consumer and type of activity (e.g., loan application, late payment, charge off, on-time payment, etc.), and then sell the resulting "credit reports" to banks and other organizations who are making decisions about whether or not to make new loans, issue credit cards, rent to new tenants, underwrite new insurance policies, hire new employees, etc.
The concept of using mathematics and statistics to quantify credit history and determine a single "credit score" for predicting risk was pioneered about 40 years ago by a company named Fair Issac Company. Their system was found to be a fairly accurate predictor of financial risk, and is now used by most lenders, insurers, landlords and employers. The "credit score" now in wide use is often referred to by the initials of Fair Issac Company as the FICO credit score.
Today, your credit score is perhaps the most important tool available to you when looking to buy a car or a house, rent an apartment, or qualify for a job. Like it or not, your credit score can be either your best friend or your worst enemy; it is a major determinant of whether or not you get the credit you seek, as well as what it will cost you (i.e., the interest rate you will pay). We'll explain more about your Credit Score in a few minutes.
Your Credit Report
Your credit report is basically a history of your experience with various creditors over the years. It is a record of whether you have met or have not met your financial commitments. Based on this information, you are assigned a "credit score." People with higher scores generally get the best terms, including lower interest rates and reduced minimum down payments. People with low credit scores can usually pay higher interest rates and possibly additional fees or insurance; or they may be denied credit altogether.
What information is contained in your credit report?
Interpreting your Credit Report is a subjective process; it takes time to read and understand all of the information it contains. So it's no wonder that creditors have turned to using the Credit Score due to its apparent simplicity.
Your Credit Score is a 3-digit number that is calculated from the information in your Credit Report. Right or wrong, it is much faster and easier for a creditor to make a decision based on your Credit Score than it is for him to wade through and interpret all of the data contained in the Credit Report itself.
While the exact formulas used for calculating a Credit Score are secret and protected, we do know the approximate percentages that various factors contribute to the final score:>
Steps you can take to improve your Credit Score and your "credit".
Now that you know how your score is calculated, you can begin making changes to improve it. Fortunately, the best things you can do are simple.
You can try to understand the laws and do this work yourself, but we have found it's so much easier to have someone do it for you. We strongly recommend using Lexington Law Firm. They are truly the industry leaders.