A Recap of Credit Basics

I have written several articles on the basics of credit, and in this article I will summarize some of the key points.

The Big Picture

The credit world is a never-ending cycle of borrowing and lending money. As a result, our society has a lot more "buying power" than good old-fashioned cash. As long as borrowers repay their loans and the lenders lend, the system will stay finely balanced.

Credit is highly personal, because it is a reflection of you. Your credit profile doesn't make you a good or a bad person, but it does make you a good or bad credit risk. Maintaining a good credit rating is a critical factor for getting loans and for getting the best interest rates on the loans.

The System

Every time you apply for credit, use your credit card, or repay what you borrow, your credit history is recorded for all lenders to see. The credit reporting system is crucial to both borrowers and lenders. Since most lenders don't personally know their borrowers, they depend on the credit bureaus to provide reliable, independent verification of your creditworthiness. And with the advent of computers, this information is available immediately.

Protecting Your Credit

Your credit report may not always be accurate. With virtually millions of entries daily, it is very easy for the information entered to be incorrect. Remember to take advantage of your free credit report. To obtain the information go to freecreditreport.com, or do a search of the credit reporting agencies. Your credit score should be 720 or above to get the best rates on loans and borrowed money. If your score is below this number, it is time to fix your credit history. This can be done in many ways: closing old credit cards with no balances, reducing your credit by paying off cards, saving more, borrowing less, etc. For additional information, review the article Protecting Your Credit.

Loans

The main reason for having good credit is to get a loan when you need it and to do so on your terms. A loan can be large or small; it can be instantly available through a credit card or bank account, or it can require your signing a complicated set of documents. Every loan covers these key points:

There are several types of loans that you can obtain, such as a home loan, car loan, or general purpose loan, and they can be for a specific purpose, such as consolidating debt or accessing lines of credit.

Credit Cards

Prudent use of your credit cards is the first step either to getting out of debt or never getting in credit card debt at all. By using a card, you tell a seller that you are guaranteeing payment for the goods through a third party – the lender. If you default or pay late, the good standing that a card lender gives you can quickly go away. Be very careful. Many people have too much credit card debt and find it very difficult to pay down the debt.

Another quick note, be sure that you understand all of the payment terms and the statements when you get a new card. Know how the payments work and how they are applied. Often this can be a very confusing process. For additional information, review the article How Credit Card Payments Work.

Leveraging

To a lender, the most attractive borrower is someone with assets under the lender's control. If you have proven financial responsibility, you are even more attractive. With these two advantages, you can often get a loan more quickly and at better terms. This process is known as leveraging the power of your assets.

Leveraging is a smart move if you can continue to pay down your credit balances. There are many ways to leverage your money; some of these include home equity loans or lines of credit on the untapped equity that has grown in your home, margin accounts on your securities held in investment portfolios, and cash value that grows inside certain types of life insurance. Remember to use prudent judgment when leveraging your accounts. Many people cannot sleep at night doing this; the risk to them is just too great. If you are someone who worries, then this may not be the best investment strategy for you. For additional information, review the article The Power of Leveraging.

Bankruptcy and Debt

There are times when people cannot get out of debt. Situations beyond your control arise and overwhelm you. Bankruptcy is a last ditch effort that should not be taken lightly. Many people think that it is the easy way out. Not really. This one event will affect your financial picture forever. It makes every aspect of life from a financial perspective seemingly impossible. Are there still people that I feel should go this route? Yes, but only under extreme circumstances when all other attempts to control or work through existing debt have not worked. For additional information, review the articles Handling Too Much Debt and Bankruptcy – What You Need to Know.

The "Basics of Credit" series was designed to give you the basic understanding of credit and how it works. In understanding the process you can use credit in your favor and not have it work against you.

Cindy Diccianni is a Registered Nurse, a Certified Senior Advisor (CSA), a Certified Long Term Consultant (CLTC), a Registered Investment Advisor and a Registered Representative with Leigh Baldwin & Company member NASD and SIPC. She is affiliated with Ortner, O'Brien & Ortner Advisory Group, Inc., Malvern PA. Her passion is assisting clients in creating financial freedom. You may contact her at Cindy@taxlegalfinancial.com.

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