Wednesday, October 6, 2010

What is Credit? - Introduction

As I get older, the more "credit" becomes important.  In order to be approved to buy a car, home, or furniture, my "credit" must be run.  But why?  I find myself asking a lot of questions, like what is "credit" exactly, and why must it be run?  What is a "credit score," and why is mine where it is? 

My transition into adulthood will no longer allow me to be ignorant about the subject.  So, in the spirit of learning and self betterment, I am going to tackle this beast head on. 

Credit (wiki definition):  is the provision of resources by one party to another party where that second party does not reimburse the first party immediately (thereby generating a debt), but instead arranges either to repay or return those resources (or other materials of equal value) at a later date.

Basically, in the simplest of terms, this means that you buy something, and don't pay for it immediately, but arrange to pay for it later. 

Credit Facts:
  • In order for a company or bank to give you a line of credit (ie a loan or credit card), they must first run a credit check.  What are they checking for exactly?
  • These companies are checking for creditworthiness.  Creditworthiness is a fancy way of saying they are checking for proof that you are likely to pay off that debt. What kind of proof? They want to see that you have been given a line of credit in the past and paid it off on time.  This shows that you are responsible and in turn boosts your creditworthiness.  Where do they get this proof from?
  • This proof is found on your credit report or credit history.  Credit reports come from a credit bureau.  Every time you fill out an application for a credit card, or loan, that bank or company forwards all your information to a credit bureau to verify your creditworthiness. 
  • There are 3 main credit bureaus:  Experian, TransUnion, and Equifax
  • Your credit score is determined by your credit report. 
  • Each credit bureau issues its own model for scoring credit, but the most known and most widely used credit score model is FICO.
  • A FICO score is between 300 - 850.  300 being terrible, and 850 being perfect. 
More in depth posts on credit to come...

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