Think Before You Apply.
The process of using credit wisely begins well before a purchase is made. Every time a person takes on new debt, whether using a credit card for a simple purchase or applying for a mortgage to purchase a new house, the same simple though process should be followed. Applicants should ask themselves:
- Can I afford to make the payments for the purchase being considered while continuing to make existing payments for housing, other living expenses, and existing debts? (This should include the incremental costs resulting from the item purchased, such as insurance for a new car.)
- Will the item purchased last at least as long as the payments? (for example, purchasing a computer versus purchasing expensive concert tickets)
- Will I be willing to make the payments for the full term of the credit?
If the answer to any of these questions is no, then you should not use credit for the purchase being considered.
So, You're Ready to Apply.
Once you make the decision to apply for credit, you will need to complete and submit a credit application. If this application is approved, you will be able to use a line of credit from the lender.
- The credit application provides the lender with basic information needed to decide whether or not to approve credit.
- The information on the application identifies the applicant, and provides residence, employment, and income information, credit and banking history, personal references, and permission for the creditor to review the applicant's file at a credit bureau. This permission is required before the applicant's credit file can be requested.
- It is important to provide all of the information requested on the application, and to answer all of the questions honestly. If an applicant has experienced credit problems in the past, it is best to be forthright about these problems. The creditor will probably discover these problems while reviewing the application. Creditors will be more inclined to approve an applicant who is straight-forward than one who they view as difficult or untruthful. time, or have been late. This information is reported by credit bureaus.
- Companies with experience in the credit business understand that problems happen. If handled responsibly, they should not reflect negatively on the applicant.
If you've never used credit before, the most direct way to establish credit is to have a co-signer. The co-signer is legally obligated to make any and all payments. When you apply with a co-signer, the lender also considers the co-signer's credit when reviewing the transaction. If your co-signer has good credit, it's likely you'll both be approved. Then, if you make payments and keep up your end of the agreement, you'll be able to build a favorable credit rating for yourself.
The Three Cs of Credit.
Lenders have to feel confident and trust that the borrower will keep their promise to repay. They decide to grant credit or a loan based on the borrower’s reputation for being responsible with money. Banks and credit companies all set their own procedures for reviewing applications for credit, but these procedures all follow similar time-proven factors. These are known as the “Three Cs of Credit,” which are Credit, Capacity, and Character.
- Credit refers to the applicant’s payment habits —whether obligations have been consistently paid on time, or have been late. This information is reported by credit bureaus.
- Capacity is the ability to make payments arising from new debt with current available income, while being able to continue payments on existing obligations. This information is found on the application and is usually verified by the lender.
- Character consists of indicators of the applicant’s trustworthiness and stability. Indicators include length of employment, time at current residence, lawsuits, and bankruptcy filings (found in public records).
Get Ready to be Evaluated.
Statistical tools are used by lenders in the evaluation process.
- The characteristics of the applicant are quantified and ranked with those of previous borrowers.
- The applicant is grouped with a pool of previous borrowers with whom they most closely match, and who have completed similar loan transactions in which the success rate is known.
- The probability of the applicant successfully handling the credit is equated to the actual experience of the group which the applicant most closely resembles.
- The loan decision is made based on the experience of this group of borrowers and the probability of payment based on actual experiences with the group.
So, What Exactly is My Credit History?
A good credit history is important because many of life's purchases are too expensive for most people to buy with cash— like cars, college tuition, and houses. Most people need to borrow money for these large purchases. A credit history provides lenders with important information about a person and how he or she handles financial obligations. It is reflective of a person’s financial reputation and can affect his/her chances of buying a house or a car, renting an apartment, getting a loan, and even getting a job. Some insurance companies now use the reports to determine auto rates.
Your credit report describes this credit history and is intended to provide facts, including:
- The subject’s name, address, and social security number — these confirm that the report and the application belong to the same individual. A large portion of the report is devoted to listing open loan and credit card accounts along with payment history as reported by creditors (both
positive and negative information).
- Public record information, including bankruptcies and legal actions.
- All recent requests for the individual’s credit information. This lets a creditor know if the applicant has been applying for multiple credit lines, which increases credit risk.
- Credit grantors who use the reports as part of a “preapproval” process prior to mailing an unsolicited credit offer do not appear on the report. The credit bureaus simply provide these grantors with a list of names that meet certain criteria described by the grantor. They are done without the subject’s knowledge and do not represent a credit risk. The companies making the requests never see the reports. The report can only be viewed with the permission of the subject of the report.
