How Credit Works Part 1
Building credit is more complicated than most people think. It's not simply a matter of paying your bills on time.
On PersonalMoneyStore.com’s payday loans money blog, we talk about a variety of financial topics and money-saving tips, tricks and strategies that help you stretch each of your hard-earned dollars the furthest.
We care about your financial welfare and want to equip you effectively to prosper financially.
That being said, today we are going to start a series on credit — undeniably the most important and least understood part of consumer financial education.
What is Credit?
Most consumers don’t realize the importance of credit or even what credit is. When most of us hear the term credit we think of all the plastic in our wallet that allows us to charge purchases for later payment.
Often times the term credit brings a mixture of both good and bad feelings because of the opportunity it provides us as well as the difficulties it can bring in light of the debt we as consumers tend to accumulate.
The Objective of this Series on Credit
For the duration of this series, however, we will be talking about credit in the terms of personal credit or credit score, or in other words the scoring index by which creditors judge our “credit worthiness” or ability to handle money effectively and responsibly.
How Credit Works
How credit works is complicated, but to get the ball rolling a little more quickly, let’s just throw out a quick description in layman terms.
Every time a consumer, such as yourself, applies for an account with a creditor — such as a bank, credit card company, retail store, auto loan, personal loan or even a home mortgage — the account is reported to each of the nations three main credit bureaus.
There are many factors which determine a good credit score.
What Creditors Track
The credit bureaus track the number of open accounts, closed accounts, account balances, credit inquiries and any history of late payments or collections that have been reported on your behalf. Through a complex algorithm unique to each of the bureaus, they assign you a numerical score.
The purpose of this credit scoring system is twofold. First, it helps protect creditors from fraudulent or irresponsible customer transactions on financed merchandise such as cars, furniture, appliances and anything else you would choose to finance with a credit card or a company’s in-house financing options.
Their are some exceptions to this rule, such as payday loans lenders. These companies typically don’t work with the credit bureaus, which makes them a good loan option for people with bad credit, but we will talk about that later in this series.
Secondly, and most importantly, credit scoring it set up to award those who are diligent and responsible with their financial resources and penalize those who are not.
The difficulty in obtaining a good credit score these days has become a little more cloudy and involves more than just paying your bills on time. For many this begs the question: Is the effort worth it? Or is having good credit really that important?
How Important Is It To Have Good Credit?
It can be easy to brush off the pursuit of good credit as unimportant, but today good credit has become a very important, integral part of every consumer’s personal and financial success. Your personal credit score has an effect on the following:
- How much you pay for car insurance
- How much you pay for house insurance
- How you pay for your personal health insurance
- How high your interest rate is on your home mortgage loan
- How high your interest rate is on auto or other personal loans
- The total credit amount you’re awarded with financed options or credit loans
- Your chances of employment
Almost every major financial transaction will consider your personal credit rating or credit score before awarding or denying you any contractual terms.
Credit and Employment
As mentioned above, more and more employers are running credit checks to validate the credit worthiness of new hires, as they believe it is the best indicator of a potential employee’s responsibility. Employers associate a good credit score with an employee’s diligence to come to work on time each day and fulfill the requirements of their job position.
The Value of Having Good Credit
You can’t put a price on good credit. Good credit saves you a fortune in unnecessary expenses over time that can be delegated to a retirement savings plan or college fund for the kids. Knowing how credit works and its effect on your financial endeavors will open doors that would otherwise stay shut. Short term credit needs are filled well by payday loans.
That concludes part one of this series on how credit works. Consider your personal credit and its limiting factors in your life and join us again tomorrow for part two.
See you then!
Posted courtesy of personalmoneystore.com, your payday loans source.
very imformative and valuable article.
Very informative post. I wish more people would learn about the importance of managing their credit wisely. It should be standard in any high school curriculum.