Monday, December 3, 2012

Credit Crunch

From buying a home to finding a dream job, there is one looming shadow which controls everyone like a puppeteer controlling a puppet.   Credit pulls the strings which grant access to homeownership, employment, and lower interest rates.    The importance of credit is undermined by the confusion many Americans have about their three little numbers.  Below is not an exhaustive explanation of credit, it merely scratches the surface and breaks down the basics of what you need to know about your credit.

What is Credit?
According to JP Morgan Chase & Co., credit is your financial trustworthiness.  Credit measures how likely a borrower is to pay back the loan.
What does Credit Control?
Among other things:
·         Helps secure lower interest rates
·         Improves opportunities to secure a credit card and other loans
·         More options when shopping for loans and a mortgage
·         Increased spending limits
·         Quicker approval for renting
·         Better rates on car insurance
·         Can help avoid paying a security deposit for utilities
What is on your Credit Report?
There are four sections on your credit report.  These sections give reporting bureaus important information which is then used to calculate your credit score. By law, you are guaranteed a free credit report once every twelve months.  To order your credit report visit  your credit score is NOT included on your credit report.
1.    Identifying Information
This includes your name, birthdate, permanent residence,…
2.    Open Lines of Credit
Any account you have open being a loan, credit card, mortgage … is considered an “open line of credit.”  This section outlines when the account was opened, the credit limit/ amount of the loan, account balance, and payment history. 
3.    Credit Inquiries
Every time someone checks your credit within the last two years, it is notated on your credit report.  This section includes both voluntary inquiries (inquiries done by your request) and involuntary inquiries (pre-approvals for loans and credit you have not requested). 
4.    Public Record and Collection Items
Information made public through court proceedings, collection agencies, bankruptcies, foreclosures, liens, wage attachments…are included in this section. 
What is your Credit Score?
Your credit score is calculated by three different credit reporting bureaus: Experian, Equafax, and TransUnion.  Each company calculates your credit score based on their own formulas developed to determine trustworthiness.  Since there are three different reporting bureaus and they employ three different formulas, you have three different numbers which compose your credit score.   Even though there are three different formulas, there are several common elements used in each equation. 
1.    Types of Credit in Use
·         Loans
·         Credit Cards
2.    Payment History
·         Do you usually pay before the bill is due?
·         How often do you let your balance roll over?
3.    Amounts Owed
4.    Length of Credit History
·         How long have you had a particular line of credit?
5.    New Credit


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