What is Credit?
In a nutshell an individual's credit score is a reflection of that individual's past bill paying history. This information is gathered from sources that offer credit. A few examples of those who offer credit are credit card companies, auto dealers, furniture stores, department stores, banks, etc. Most business's that offer goods for sale provide credit to their customers. After a credit account is established that customer's credit history begins.
Payments made by customers fall into two categories, they are either on time or late. This information is then recorded passed on to a variety of repositories; also known as credit bureaus. The three main repositories are Equifax, Experian, and Trans Union. These and other repositories gather the payment history patterns of millions of consumers, then using a formula are able to provide credit scores on consumers at the request of those businesses that offer credit to their customers. Companies willingly share the information they gather with the repositories in return for credit histories submitted by all the other companies.
Companies will pull credit reports before approving a loan. These loan decisions of all types are based on 3 c's, they are character, collateral & capacity. Collateral is the actual item being purchased or other items the customer owns which can be held against the value of the loan. Capacity is the ability to pay back the loan, so work history and current employment is scrutinized. Character is best determined through an individual's credit score. Credit offering companies want to know if the money they are loaning will be paid back and the credit score gives them this information as the higher the score the better the risk to them.
Protecting your credit score becomes important as future purchases of cars, homes, and goods are considered. Credit scores range from the low end around 450 to upper end at 850. It is those with scores above 680 that receive better interest rates and a broader range of loan products. Due to the complicated nature of the formula used to determine credit scores, it is not possible to manipulate or change a credit score. Obvious to maintaining a high credit score is paying bills on time. Most damaging to credit scores are bankruptcy, foreclosure, and short sales. Time does heal all wounds, but in our credit driven world the wait may feel restricting. Credit is always a good tool in emergencies. So in the long run it is better to protect your credit score rather than repair a damaged one.
Understanding Credit Links