A Quick Look at How Credit Works

By: Javi Calderon
A Quick Look at How Credit Works

Many Americans fail to realize how far-reaching and intertwined credit is. Personal credit is much more than a piece of plastic in your wallet that allows you to charge purchases and pay for them later. In fact, credit, and your credit score, is a record of your financial activity. Your credit-related activity is reported to three credit bureaus that each calculate your credit score.

Every time you apply for an account with a creditor - a credit card company, home loan mortgage, bank account, utility provider, car dealership, etc. the activity on that credit line affect your credit rating. Obviously, timely and responsible payments help you build a positive credit rating. Sporadic, late and delinquent payments negatively affect your credit rating.

Your credit score has a profound impact on your life. Banks check your credit rating when you apply for loans or new bank accounts, car dealerships check your score when you try to buy a car, even apartment complexes check your credit score before allowing you to rent an apartment. Filing for bankruptcy is absolutely catastrophic for your personal credit. After bankruptcy it may take several years before any financial institutions allow you to open a line of credit.

The credit system is set up to protect creditors from fraudulent and irresponsible consumers and to reward people who are responsible with their financial resources while penalizing those who are not.

There are financial products available for people with poor credit. Debit cards are an alternative to credit cards that require funds to be deposited in the account and withdrawn as purchases are made.

Cash advance loans have found a niche as a short-term financial solution for people with poor credit. Cash advance loans are not reported to the credit bureaus, and applying for one does not involve your credit rating.
While many people think they can get by with poor credit, having a poor credit score can hinder your chances of being employed and will certainly result in paying higher interest rates on mortgages, auto loans and car insurance. People who use lines of credit with poor credit scores can pay thousands of dollars extra in interest rates on these products. ]

What is the moral of the story? Simply make your payments on time, don’t over draft on accounts or become delinquent on payments. Having good credit will not only open doors for you and facilitate your financial dreams, but it will save you thousands of dollars.