The ability to obtain credit for making major purchases in life, such as buying a property or car, computer or home entertainment center, is an essential part of today’s economy. Whether or not a loan will be granted for the purchase is determined by an individual’s credit rating, and this rating may also determine how much the credit will cost.
When a lender receives an application for a loan, it will have the applicant’s credit record checked by one of the various credit monitoring services or credit reporting agencies. These organizations hold a wide range of information about a potential borrower that is based on how previous and current lines of credit have been managed. Information is collected from a variety of sources, including other lenders, landlords and merchants.
The reports look at how long an individual has had a credit history and the current level of debt. Banks and other financial institutions that provide mortgages are especially interested in credit reports as they are likely to be lending significant amounts of money, but other organizations such as department stores and auto dealers also need this information.
Credit reporting agencies provide the lender with the applicant’s credit score, a three-digit number that summarizes the state of the borrower’s credit history. Both the length of that history and the amount of debt held contribute to the overall credit score, but the key factor is whether or not bills are, or have been, paid on time. If they have not, and especially if they have regularly been paid late, the score will drop. The lower the score, the more difficult or more expensive it may be to gain credit.
The credit scores allow lenders to make their own decisions as to how likely a borrower is to repay the loan. A low score does not automatically mean that credit will not be offered, but it might make the cost of the loan more expensive.
The simplest and most effective way to improve a credit score is to pay bills on time, as this will give lenders confidence that finances are being well-managed by the borrower. People who have no credit history because they have avoided loans will find this will reduce their score and may make it harder to take that initial step to obtain a loan. Credit reports can contain errors, and any borrower is entitled, for a fee, to get access to their report. Any wrong information can be removed, and this may improve the credit score.
Credit ratings for businesses work in a similar way as for individuals and sometimes free company credit reports are available. Business relies on credit to help manage cash flow in particular, and credit ratings can be improved by always paying bills to suppliers in a timely manner. It is good practice for businesses to let credit bureaus have information about their customers, developing positive relationships that may have an influence on credit decisions in the future.
Ensuring that the business is listed in telephone and online directories will help credit agencies check that the business is genuine, and for smaller businesses that may not have a detailed credit rating, the personal credit profiles of key individuals should be kept under review.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.