Credit in a Nutshell

Your credit rating will be used in many big scenarios throughout your life and can affect your access to quality lenders. With March being National Credit Education month, there is no better time to discuss the application of credit and the importance of maintaining good credit health.

The term credit was first seen used by bankers and finance professionals in 14th century London. Since then, credit has been used to identify one’s financial trustworthiness. Having a “good” credit history means that you’ve previously handled your credit well by making on time payments and keeping balances in check. Creditors will also look into things like employment and salary to see if you make a good candidate for a loan and will therefore be more willing to work with you. Having less than perfect credit can follow you for quite awhile, but it is fixable if you take the steps to repair your credit history.

While these are the standards that many are familiar with today, the loan application process looked rather different in the past. For much of history, loans were made on a casual basis with lenders using personal character assessment to deem an applicant worthy of credit or not. The introduction of credit ratings in the 1950’s created a standardized, impartial system to judge an applicant’s credit worthiness. This credit rating system has evolved overtime, but the general idea of having a numerical credit score remains. 

Three major credit bureaus, Experian, TransUnion, and Equifax, track your financial information, such as payment history, amounts owed, length of credit history, types of credit used, and recent credit inquiries to determine your credit score. The Fair and Accurate Credit Transaction Act of 2003 entitles you to a copy of your credit report from each of these bureaus once per year. With the evolution of technology, there are other ways to track your credit score, with many banks and credit card companies giving you access to your credit score at the touch of a button.

The credit scoring system is not perfect. For one, you must actually have utilized some form of credit to even have a credit score. One could hypothetically have no need to loan money or utilize credit and would therefore have no credit score. Errors are not uncommon on credit reports. You may also be the victim of identity theft and have fraudulent activity appear on your credit report. Although there are methods to dispute erroneous information that appears, these issues may go undetected if you do not monitor your credit reports. Those who have poor credit history can also fall victim to predatory lenders, as they do not qualify for better quality loans or credit. This may further deteriorate and already damaged credit score, making it that much more difficult to improve your score. 

There is much more to know about credit and how that plays a role in your financial life.  With numerous lenders and types of credit, it is always best to consult a financial professional to know what your best options are.

The information provided does not constitute an offer or a solicitation of an offer to buy any securities, products or services mentioned.  This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Consult your financial professional before making any investment decision.  Indices are unmanaged and do not incur fees, one cannot directly invest in an index. Past performance does not guarantee future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss.

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