Credit is extended or given to an individual with the promise to pay back.
4 C’s of Credit:
*Collateral-Money or asset that lenders can take from you if a debt (credit) goes unpaid. Known as a “secured” loan, ie. Mortgage, car, or boat.
*Capital-Are you able to pay back the debt (credit)? Income, employment history are key factors in deciding your creditworthiness.
*Character-Are you trustworthy? Do you pay on time? Whether or not you pay often, sometimes or not at all will determine the amount of credit you will receive including the interest rate.
*Capacity – Do you have enough income, in comparison to other debt, to be able to make the payments on a new loan? This is often called debt to income ratio. While your income is NOT on your credit report, it is a significant factor in your ability to borrow.
5 Components of a Credit Score (300-850)
-35% (Pay History) Pay bills on time all the time! Delinquent or Collection Accounts can have a negative impact score.
-30% (Amounts Owed) Keep balances low! High balances can negatively impact your score.
-15% (Length of Credit History) Do not close paid off accounts! No, really. Do not close paid off accounts!
-10% (New Credit) Be strategic . Have a plan. 1 major credit card is plenty!
-10% (Types of Credit Used) Too many personal loans can negatively impact your score. Having the right mix is key. One revolving account such as credit card, an installment loan such as car or mortgage will suffice.
For further insight or if you have any questions about credit and how it works, please give us a call at 205-251-1572 or visit www.gateway.org to schedule an appointment or schedule a workshop with a certified financial counselor.
Visit annualcredit.com to review your credit report from Transunion, Equifax and Experian.
Tue, April 17, 2012
by Karin Park