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Consumer Credit

What is Credit and Credit Worthiness?

Consumer Credit, in the financial industry, refers to money provided to an individual in lieu of payment. Credit is used most commonly used to purchase items that cost more than an individual typically is able to afford in a single cash payment (like a car or house). Credit is also commonly used as a convenience (as in a credit or store card).
Credit Worthiness is a measure of how much money an individual is able to borrow while still being able to reliably pay back the debt later in time. Financial Institutions typically use one or more of three main national Credit Reporting Bureaus to obtain credit worthiness history/ratings before extending credit to a consumer. Using a Bureau(s) can ensure higher accuracy in calculating credit worthiness as the Bureaus typically track a larger set of data among many other reporting financial institutions.

How Credit Scores are Calculated

A Credit Score is a mathematically calculated representation of an individual's credit worthiness at a point in time. There are several ways to calculate credit scores on varying criteria; several organizations offer differing credit score products.
Credit Scores most commonly take into account the following information:
  • Previous Credit History, including Defaults, Settlements, Bankruptcy, etc
  • Payment History - If you're making payments on-time
  • How much Credit you have, and how much is currently used
  • Number of and Types of Credit (Auto, Home, Credit/Store Cards, etc)
  • How long your credit history goes back in time
  • How often you apply for and are granted additional credit
Credit scores may also be based on criteria including Income Level, Job Type, Local Community and Economy statistics, Utility costs, Bank Account Balances, etc.

Improving Your Credit Score Short-Term

  1. Obtain a credit report from each of the three main Credit Reporting Bureaus.
  2. Report any issues in your credit report, specifically accounts you didn't open, hard inquiries that you did not know of/approve, and payments you made on time that show up as late.
  3. Draft letters to any creditors (using addresses provided in the report) that haven't updated a significantly current (lower) balance in your report, asking for this update (such as if you paid a card/loan off one or two months ago but don't see a recent update for this item).

Improving Your Credit Score Long-Term

Unfortunately, improving a credit score significantly usually takes time. Some information, such as Bankruptcies, may remain on your report for up to 7 to 10 years. However, with a little effort over several months or years, credit scores will improve!
The best steps to take often include:
  1. Make payments on time, or work with the creditor directly for alternate payment arrangements.
  2. Pay off debt such as Credit cards and keep balances as low as possible.
  3. Close excessive, unused store or credit card accounts
  4. Refrain from opening new credit and store card accounts more often than required
In addition, review your free credit report(s) yearly and report any anomalies, specifically looking for accounts you didn't open, hard inquiries that you did not know of/approve, and payments you made on time that show up as late.

Protecting Your Credit

The best way to protect your credit is to check your credit report from each of the three main Credit Reporting Bureaus yearly. Be on the look-out for, and report to the respective reporting bureau ANY item you find in the report that is incorrect.
See Also: Identity Theft

Free Annual Credit Reports

You are entitled to one free online credit report from each of the three main Credit Reporting Bureaus per year. The following website is the only service authorized by these Credit Reporting Bureaus; they warn consumers to never provide their personal information to any other company or person for requesting free annual credit reports under the FACT Act.

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