About Credit

About Credit

Credit is defined as an agreement between a borrower and a lender in which the borrower receives something that is of value to them now, and agrees to make payments on it later. Generally there is interest added into the value that the borrower has received. A consumer, or borrower, has a line of credit. This is the amount of money that is available to them based on information about the consumer. Lines of credit may either be secured or unsecured.
Many times it can be hard to obtain credit if you have never had any. Most financial institutions are not just going to hand over a large sum of money without making sure you are good to pay it back. This is where you need to make sure you have good credit history. Many think that they do not have a credit history at all but are surprised to learn that they really do. If an individual has a membership to a local place of business or has any loan, this will be on the credit score.
The first step in checking your credit is to obtain a copy of your credit report. You can get a free copy from any of the three major credit bureaus: TransUnion, Equifax, or Experian. Federal law states that each individual is entitled to one free copy once a year from each of these credit bureaus.
If one wishes to make their credit score more appealing, there are many things that can be done. Consider any of these steps in making a credit score work better for you.

  • Pay all bills on time. Set up payment reminders in order to make sure all bills are paid when due. If you are moving, make sure to contact every place that sends bills to ensure all bills are paid on time.
  • Get a store credit card, and use it wisely. Spend what you can afford to spend, and then when the bill arrives, pay it off in full.
  • Ask your bank where you have a checking account at for a credit card. Collateral may be used to ensure that if a bill is not paid, a source of funding will be available to pay for it.
  • Do not apply for every credit card offer that comes your way. This is only going to hurt your credit score. Every time an individual opens a credit card or applies for one, it goes onto the credit report and effects your credit score.

Lenders look at many factors when a consumer applies for credit. There are 3 C’s for good credit history: Client history, collateral, and capacity. Lenders will look to see if bills are paid on time each month, how much, if any collateral there is to repay back the loan in case payments are not made, and the ability to pay back what the consumer owes based on what their financial situation is.
Once you have established your credit, it is very important be responsible with it. The following are tips on how to maintain good credit.

  • Always shop around for the best interest rate. Take your time and look at each offer that comes your way before deciding if it is right for you or not. Make sure you fully understand all terms and conditions that come with it before agreeing to it.
  • Set a limit on how much you can spend each month with your credit. Only count in income that you know is guaranteed. At the end of the month, try to pay it off in full. If you use a credit card for day to day expenses, such as gas, groceries, or entertainment, make sure that portion gets paid off in full each month. Interest charges will be lower each month when you can afford to pay off more.

If you are wondering how much credit you can really afford, there is a simple way to figure it up. Take your monthly fixed expenses, such as rent, loans, credit card payments, etc. and divide that by your monthly take home pay. This will give you your debt to income ratio. This number should be below 28. Anything higher than this could mean denied credit or having to pay a higher interest rate.
Credit is something that everyone will have in their life. Good credit can be obtained easily by being responsible, and following the tips that are listed above. Use your credit wisely and you will be sure to get the best deals around town.

*The above content is for informational purpose only. It does not constitute professional financial advice. If you have more questions, please reach out to a financial advisor for more information.