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Understanding Credit & Credit Reports

Everyone will want to borrow money at some point in their lifetime. Banks, mortgage companies, and credit card companies look to credit reports to determine whether to lend money and how much interest and down payments they will require.

Having good credit can make the borrowing process easier and it can result in thousands of dollars of interest charge savings over time. Luckily, good credit is a financial goal that almost anyone can achieve. Here are a few of the major factors that lenders will consider in evaluating your credit report:

  1. Payment History

    Credit reports list payment histories for almost all accounts. This payment history will generally show up as “current” or “pays as agreed” or thirty, sixty or ninety days late. Obviously, having more “current” or “pays as agreed” accounts is better than having more late accounts.

    Having a lot of late accounts simply gives the would-be borrower something to work on prior to applying for a loan. In many cases the would-be borrower can contact late account creditors and negotiate a lower monthly payment plan. This can allow the would-be borrower to increase the number of “current” or “pays as agreed” accounts, even though the would-be borrower cannot pay the liability in the amount that it was initially agreed upon.

  2. Account Balances

    Credit reports list account balances for almost all accounts. The account balance total is considered by lenders in light of the would-be borrower’s income and assets. This most often involves applying various financial ratios, to determine where the would-be borrower’s finances stack up with his or her peers.

    A would-be borrower with a debt to income or asset ratio should work to reduce current debt balances or increase income or earnings prior to applying for a loan.

  3. Average Credit Age

    Credit reports list the age for almost all accounts. The average credit age is simply the number of months that each account has been open divided by the number of total accounts.

    Longer average credit age can demonstrate financial responsibility or trustworthiness; whereas, a shorter average credit age can indicate financial irresponsibility.

    Would-be borrowers would be well advised not to close any long standing accounts prior to applying for a loan, but it might be advisable to close any short term accounts prior to applying for a loan.

  4. Types of Credit Extended

    Credit reports list all secured accounts and unsecured installment accounts. Secured accounts are simply accounts for which the would-be borrower has pledged assets. A mortgage secured by real estate is a good example.

    Unsecured installment accounts are accounts for which the would-be borrower has not pledged any assets. A credit card is a good example of an unsecured installment account.

    A few unsecured installment accounts can demonstrate financial responsibility (assuming that they are paid timely) and a high number of unsecured installment accounts can help improve the would-be borrower’s credit-to-debt ratio.

    Would-be borrowers might be able to be extended easy to obtain credit accounts prior to applying for larger loans, with this in mind (however, would-be borrowers will want to consider the next factor before they apply for additional accounts).

  5. Number of Credit Inquiries

    Credit reports list two types of credit inquires, namely regular inquiries and account review inquires.

    Account review inquires are requests from the would-be borrower himself or from lenders who have already extended credit to the would-be borrower. Account review inquires generally are not harmful to the would-be borrower’s credit report, as they are only viewable by the would-be borrower himself.

    Regular inquires are inquires by lenders who are considering lending money to the would-be borrower. These types of inquires are viewable by future lenders and they can have a negative impact upon the would-be borrower’s credit worthiness.

    The would-be borrower may find it advisable to limit any regular inquires for several months to several years before applying for a loan.

Understanding these simple points can help would-be borrowers improve their credit reports, increase the chances that they will qualify for loans, and save thousands of dollars in interest charges.

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