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| Applying for credit |
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Creditors look at several key indicators when you apply for credit. You have considerable control
over these factors based on how much you manage your credit, so it's important to always keep them in mind.
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| Credit scoring
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| Credit scoring is a system used by banks and other lending institution
whether or not you are credit worthy. It is weighed even more heavily when you apply for unsecured credit- credit lines and
credit cards that do not require collateral.
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| Creditors collect information about you and your credit experience
from your credit application and your credit report. This information may include your bill-paying history, the number and
types of accounts you have, late payments, collection actions, if you have applied for new credit recently, outstanding debt,
and how long you've had existing accounts. Using a statistical program, creditors compare your information to the credit
performance of consumers with similar profiles.
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| Each creditor may use its own credit scoring model, different
scoring models for different types of credit, or a generic scoring model developed by a credit scoring company.
A credit scoring system awards points for each factor that helps predict who is most likely to repay a debt.
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The three C's of good credit
- Client History: How responsible you are about paying bills on time
- Capacity: Your ability to pay back a loan based on your income and financial position.
- Collateral: Security for the lender in case you don't pay back the loan. A house, for example,
would be used to collateralize a mortgage.
Positively changing your "three C's" will help improve your credit standing.
The first two C's are extremely important in developing what is called your "credit score" or "credit rating."
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| The total number of points-a credit score-helps predict
how creditworthy you are, that is, how likely it is that you will repay the loan and make the payments when due.
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| Maintaining good credit
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A few simple rules can help you build and maintain a solid credit history.
- Pay at least the minimum payment due on time every month.
- Don't overextend yourself. The fewer account you have open, whether they are loans or credit cards, the better.
- Don't spend income now that you hope to make later.
- Avoid transferring balances unless you are really getting a better interest rate.
- Notify creditors when you move, so bills arrive on time and you pay on time. If for some reason
you don't get your bill, you still owe the payment. If your normal due date is coming up and you
haven't received a statement, call the customer service number listed on a previous statement or credit card.
The company can tell you your minimum payment and where to send the check.
- Check your credit report at least once a year to make sure it's accurate, Serious errors-bad
enough for credit to be denied-may appear in a credit report at any given time. The sooner you
spot an error, the faster you'll be able to correct it.
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