Credit is widely and readily available to many of us today. It is not unusual for a customer to walk into a retail store such as Target or Home Depot and be offered a credit card account that can be used immediately. However, if the applicant has not used credit previously (no credit) or if he or she has failed to honor credit agreements in the past (bad credit), an offer of credit is typically not extended. Your success in obtaining credit hinges on an understanding the credit approval process and having a good credit reputation.'
The Credit Approval Process
To obtain credit, you must first complete a credit application. Based on the information in this application, the lender will investigate your credit history. The information is then evaluated(sometimes instantly via computer), and the lender decides whether to extend credit. When an application is approved, the rules of the account are contained in the credit agreement
You Apply for Credit
The Credit Approval Process
To obtain credit, you must first complete a credit application. Based on the information in this application, the lender will investigate your credit history. The information is then evaluated(sometimes instantly via computer), and the lender decides whether to extend credit. When an application is approved, the rules of the account are contained in the credit agreement
You Apply for Credit
A credit application is a form or interview that requests information that sheds light on your ability and willingness to repay debts. This information helps lenders make informed decisions about whether they will be repaid byborrowers. Answering questions completely and honestly both on an application form and during an interview (if any) is important. If inconsistencies arise during the lender’s subsequent investigation of the applicant’s credit history, the lender could refuse the request for credit or charge a higher interest rate. At the time of application, always ask for a copy of the rules governing the account, including the APR and various repayment terms. However, these terms are not final and can change when the actual decision to lend is made. That is why you should read all credit contracts before signing.
Approximately 12 percent of all people who apply for credit are denied. Half of the unsuccessful applicants have no established credit history (a continuing record of a person’s credit usage and repayment of debts) or their credit history contains negative information. A bad credit history is like having high blood pressure—you may not know you have a problem until something bad happens, such as when your loan application is rejected.
The Lender Conducts a Credit Investigation Upon receiving your completed
credit application, the lender conducts a credit investigation and compares the findings with the information on your application. The goal of the investigation is to assign a credit rating to the applicant; this rating is the lender’s evaluation of the applicant’s creditworthiness. In assigning a credit rating, lenders will look at the applicant’s prior credit usage; repayment patterns; and other important characteristics, such as income, length of employment, home ownership status, and credit history To conduct its investigation, the lender obtains a credit report from a credit bureau that keeps records of many borrowers’ credit histories. Lenders pay a fee for each credit report requested. Credit bureaus compile information from merchants, utility companies, banks, court records, and creditors. Most of the more than 2000 local credit bureaus in the United States belong to national groups that collectively have access to the credit histories of more than 160 million adults.
Lenders use a credit scoring system (also known as risk scoring) in which a statistical measure is used to rate applicants on the basis of various factors deemed relevant to creditworthiness and the likelihood of repayment. All three of the major credit-reporting bureaus calculate and report credit scores to lenders. You also have the right to know your scores, although you usually must pay a fee to do so. The most well-known score is the FICO score developed by Fair, Isaac and Company.
The Lender Decides Whether to Accept the Application and Under What Terms
The approval or rejection of credit is based on the lender’s judgment of the willingness and ability of the applicant to repay the debt. If the application is accepted, a contract is created that outlines the rules governing the account. For credit cards, this contract is called a credit agreement. For loans, the contract is called a
The actual lender always makes the decision about whether to grant credit. Credit scoring simply allows lenders to categorize credit users according to the perceived level of risk. Under the concept of tiered pricing, lenders may offer lower interest rates to applicants with the highest credit scores while charging steeper rates to more risky applicants. Even people with low credit scores usually can find some lender that will say yes, however. The interest rates will be higher for those borrowers. Of course some applicants represent such high risk that a lender will deny the application for credit. For this reason, you should always make sure that your credit bureau file is accurate before filling out a credit application promissory note (or simply, the note).
Your Credit Reputation
The information about you that is contained in credit bureau files is one of the most important aspects of your financial life. It is used not only when lenders decide whether to approve your applications for credit but also when you apply for a job, insurance, and rental housing. Thus, it is important that you build a good credit reputation and confirm that the information in your file is as accurate and up-to-date as possible.
Building a Credit History
Approximately 12 percent of all people who apply for credit are denied. Half of the unsuccessful applicants have no established credit history (a continuing record of a person’s credit usage and repayment of debts) or their credit history contains negative information. A bad credit history is like having high blood pressure—you may not know you have a problem until something bad happens, such as when your loan application is rejected.
The Lender Conducts a Credit Investigation Upon receiving your completed
credit application, the lender conducts a credit investigation and compares the findings with the information on your application. The goal of the investigation is to assign a credit rating to the applicant; this rating is the lender’s evaluation of the applicant’s creditworthiness. In assigning a credit rating, lenders will look at the applicant’s prior credit usage; repayment patterns; and other important characteristics, such as income, length of employment, home ownership status, and credit history To conduct its investigation, the lender obtains a credit report from a credit bureau that keeps records of many borrowers’ credit histories. Lenders pay a fee for each credit report requested. Credit bureaus compile information from merchants, utility companies, banks, court records, and creditors. Most of the more than 2000 local credit bureaus in the United States belong to national groups that collectively have access to the credit histories of more than 160 million adults.
Lenders use a credit scoring system (also known as risk scoring) in which a statistical measure is used to rate applicants on the basis of various factors deemed relevant to creditworthiness and the likelihood of repayment. All three of the major credit-reporting bureaus calculate and report credit scores to lenders. You also have the right to know your scores, although you usually must pay a fee to do so. The most well-known score is the FICO score developed by Fair, Isaac and Company.
The Lender Decides Whether to Accept the Application and Under What Terms
The approval or rejection of credit is based on the lender’s judgment of the willingness and ability of the applicant to repay the debt. If the application is accepted, a contract is created that outlines the rules governing the account. For credit cards, this contract is called a credit agreement. For loans, the contract is called a
The actual lender always makes the decision about whether to grant credit. Credit scoring simply allows lenders to categorize credit users according to the perceived level of risk. Under the concept of tiered pricing, lenders may offer lower interest rates to applicants with the highest credit scores while charging steeper rates to more risky applicants. Even people with low credit scores usually can find some lender that will say yes, however. The interest rates will be higher for those borrowers. Of course some applicants represent such high risk that a lender will deny the application for credit. For this reason, you should always make sure that your credit bureau file is accurate before filling out a credit application promissory note (or simply, the note).
Your Credit Reputation
The information about you that is contained in credit bureau files is one of the most important aspects of your financial life. It is used not only when lenders decide whether to approve your applications for credit but also when you apply for a job, insurance, and rental housing. Thus, it is important that you build a good credit reputation and confirm that the information in your file is as accurate and up-to-date as possible.
Building a Credit History
Some people who are new to the world of credit wonder whether they will ever get credit when they need it. They will if they establish a good credit history. This is what is meant when someone is said to have “good credit.” The following steps can help you have “good credit”:
- Establish both a checking account and a savings account. Lenders see people who can handle these accounts as being more likely to manage credit usage properly.
- Have your telephone and other utilities billed in your name. The fact that you can maintain a good payment pattern on your utility bills indicates that you can manage your money wisely and will do the same with your credit repayments
- . Request, acquire, and use an oil-company credit card. These cards are easy to obtain. If one company refuses, simply apply to another company, as companies’ scoring systems differ. Use the credit sparingly, and repay the debt promptly
- Apply for a bank credit card. Your own bank is the best place to start your search for a credit card. If not successful there, you usually can find some bank that will issue you a card (search at www.bankrate.com). The credit limit may be low (perhaps $500) and the APR high (perhaps 27 percent), but at least the opportunity exists to establish a credit rating. Later, you can request an increase in the credit limit and a lower APR
- Ask a bank for a small, short-term cash loan. Putting these borrowed funds into a savings account at the bank will almost guarantee that you will make the required three or four monthly payments. In addition, the interest charges on the loan will be partially offset by the interest earned on the savings.
- Pay off student loans. Some have their first exposure to credit through the student loans they use to attend college. Paying off these loans quickly through a series of regular monthly payments can show prospective lenders that you are a responsible borrower.
Managing Your Credit Bureau File for Free Federal
law requires credit bureaus to provide consumers with their credit reports upon request. You can obtain one report for free each year from each of the national credit bureaus. In addition, consumers must be notified if merchants report negative information to a credit bureau.
You should request a report periodically (perhaps every year) or whenever you move, have a change in family status (marry, get divorced, or become widowed), or resolve any credit billing errors or disputes (to ensure that negative information is not in your file). To obtain a report, contact one or more of the three major credit-reporting bureaus: Equifax (www.econsumer.equifax.com), TransUnion (www.transunion.com), and Experian (www.experian.com/consumer/ index.html).* When you obtain your report, thoroughly inspect it for accuracy. The Fair Credit Reporting Act (FCRA) requires that reports contain accurate, relevant, and recent information and that only bona fide users be permitted to review a file
for approved purposes. (One in five complaints to the Federal Trade Commission involves credit bureaus.) FCRA is partially enforced by consumers. If you find an error or omission, you should immediately take steps to correct the information. Here’s how:
- Notify the credit bureau that you wish to exercise your right to a reinvestigation under FCRA. Specifically, you should ask the bureau to “reaffirm” the item. If the credit bureau responds by stating that the information is accurate, you have the right to challenge the item with the lender involved.
- The bureau must reinvestigate the information within 30 days. If it cannot complete its investigation within 30 days, it must drop the information from your credit file
- If the information was erroneous, it must be corrected. If a report containing the error was sent to a creditor investigating your application within the past six months, a corrected report must be sent to that creditor.
- If the credit bureau refuses to make a correction (perhaps because the information was “technically correct”), you may wish to provide your version of the disputed information (in 100 words or less) by adding a consumer statement to your credit bureau file. This statement will be included with any credit reports by that bureau.
- Negative information in your file is generally not reportable after a period of seven years except for bankruptcy data, for which the time limit is ten years.
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