Definition of Credit
Fundamentally, “credit” means buying now and paying later. Also, we have two lesser recognized types of consumer credit: installment credit and revolving credit accounts.
The former encompasses purchases that involve a contract (i.e., easy payment plan) that outlines the required down payment or trade deal, any finance charges and fees, and all subsequent payments.
The latter, however, deals with those accounts that have a preset limit, allowing the consumer to make any number of purchases up to the limit on credit and pay the balance off at their own pace, requiring only a minimum monthly payment and usually charging interest on the remaining balance (sometimes including previous interest).
The Five C’s of Creditworthiness
Now we can move on to the consumer’s creditworthiness. Any time you are considered for consumer credit, the lending company wants to make a thorough evaluation of your risk level. The exception is so-called bad credit loan lenders. So, if you have bad credit and are looking for loans, you better use Localcashhelp or similar website.
Most lenders tend to rely on the “five C’s” of credit to determine if you are creditworthy.
The first of these C’s is character, which essentially evaluates your sense of responsibility to your debts.
The second is capacity or your ratio of current income to current credit obligations.
Next, lenders also typically consider your capital (“the size of your financial holdings or investment portfolio”).
The fourth of these C’s is the amount of collateral you have available to secure a line of credit (i.e., a vehicle or tract of land).
Lastly, lenders normally also assess current economic conditions that could affect your ability to repay your debt, such as being laid off from your current job.
Calculation of Your Credit Score
Once all of this data is gathered, lenders normally then convert this information into your credit score to easily measure your creditworthiness.
Credit scores are comprised of three digits, and companies set standards to determine the level of credit score require to obtain different levels and types of credit.
If your credit score is not high enough, your application for that particular credit account will be turned down. In the end, there are five factors that affect your credit score. Around thirty-five percent of your credit score involves your level of success in paying your past debts.
Then, the next thirty percent encompasses all your current debts owed and any credit available to you. Next, about fifteen percent of your credit score is affected by how long your accounts have been open. The longer they have been open the better.
Also, ten percent of your score is shaped by the types of credit accounts you currently have open. More variety ultimately shows lenders you are skilled in managing your money.
Finally, the last ten percent of your credit score is determined by the number of attempts you have recently made to set up new credit. Too many applications for new credit can be a sign of financial instability as the consumer tries to pay off past debts with new credit.
In conclusion, I would like to offer you some suggestions that will help you apply this information and begin improving your credit rating today:
Credit Rating DO’S:
- DO make a strong effort to pay all of your current and future bills on time.
- DO keep balances low on as many accounts as possible.
- DO open new accounts as needed and manage them effectively, especially if you have had past problems with your credit history.
- DO check and/or monitor your credit reports frequently (at least once a year).
Credit Rating DON’TS:
- DON’T hesitate to seek help from your creditors and/or a credit counselor if you are having trouble meeting all of your obligations. That way you can make a better plan to repay your debts.
- DON’T try to raise your score by closing accounts. This might actually lower your score.
- DON’T apply for or open too many accounts. This could also lower your score even further.
- DON’T be afraid to have credit cards and other lines of credit as long as you use them responsibly. This is how you can rebuild your credit history.
- DON’T try to fix your credit score over night. It takes time and planning to effectively raise your credit rating.