Understanding Credit: Part I

Looking for a loan?

You can be the nicest, most neatly dressed, most polite person in the world with a solid job and a glowing letter of reference from your grandmother, but that won’t guarantee you’ll get that mortgage, car loan or even credit card. When you fill out an application for that loan, the loan manager is going to pull a credit report, and on that report will be your credit score.

So What is Credit?!

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Wikipedia defines a credit score as “a numerical expression based on a statistical analysis of a person’s credit files, to represent the creditworthiness of that person, which is the likelihood that people will pay their bills.” Whenever you apply for credit, employment or housing, information on your application is sent to a credit bureau. Experian, TransUnion and Equifax are three credit bureaus that compile your credit history information. Although these organizations use different calculation methods to come up with a credit score, no matter which method is used, your credit score tells a potential lender or landlord how likely you are to pay your loan or rent on time. It also helps a potential employer verify your identity and other personal information.

So to make things as simple as possible, you can look at your credit score as if it were a report card.  Just like a university is more likely to give you more scholarhips money for having a higher GPA, a financial institution will be more likely to loan you money if you have a good credit score.  While there may be some diverse opinions out there that say you don’t need to rely on a credit score, you can’t deny that arming yourself with knowledge is a good thing to do regardless.  

Until next time,