Credit Scores and Other Eligibility Requirements

Your Credit Report and Credit Score

By now you have probably realized that your credit report and your credit score are closely tied to one another. You have access to your credit report through one of the reporting agencies:

Equifax
Experian
TransUnion

Four types of information appear on your credit report. See the graphic below to learn about these four types.

The credit reporting agencies collect information from companies that have previously extended credit to you. These agencies, however, do not decide whether or not you get the loan, they only supply the information. The lenders make their decisions based on the information provided. That's why it is important to check your credit report at least once a year to make sure there are no errors in the report. You should also check your report prior to applying for a mortgage or other large loan.

Your credit score, sometimes called a FICO or Beacon score, is calculated based on the things found in your credit report. Check out the graphic below to see how your score is calculated.

Components of your credit score:
Tye of credit you have, New credit opened, length of credit history, amount you owe, and payment history.

Credit scores, and by association your credit report, affect more than your ability to borrow money. Employers may check it before offering you a job, especially if your job will make you responsible for handling money. If you want to rent a house or apartment, your prospective landlord will check your credit to determine if you will likely pay your rent on time. Insurance companies will review your credit history to see if they want to insure you. View the graphic below to see what a "good" credit score is.

800: Exceptional
740-799: Very dependable borrower
670-739: Good borrower (avereage U.S.)
580-669: Risky borrower but can get credit at higher rates
579 or lower: A very risky borrower

Dos and Don'ts of Establishing Credit

Self Assessment

Five "C's" of Credit

So, are you only a number to your creditors? Not really. While lenders certainly consider your credit score, they are also looking at the five "C's" of credit: character, capacity, capital, collateral, and conditions.

Character looks at a borrower's integrity and willingness to repay their debt. Things like filing bankruptcy, failing to pay child support, or business failure can make a lender think twice about offering a loan.

Capacity refers to the resources a borrower has available to repay the loan. Does the borrower have a good-paying job, savings, and investments? A lender would look more favorably on a borrower that had these.

Capital refers to what else the borrower owns and owes. If what the borrower owns is significantly more than what the borrower owes, then lenders might be willing to overlook limited cash flows.

Collateral is property owned by the borrower that can be pledged as security against a loan. Sometimes the collateral will be the item the borrower is trying to get the money to buy, like a house or a car. Other times it might be items the borrower already possesses.

Conditions have less to do with the borrower and more to do with the climate of the economy in general. In times of economic slowdown, the money supply will shrink and money becomes more expensive. Lenders then will only lend to those with the very best credit. In times of economic boom, money is cheaper and lenders are more willing to extend credit to those whose credit is not as perfect.

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