Credit Basics

The Meaning:

The term credit comes with two definitions. One, it means to borrow capital to purchase things you want, and second, it means to repay these loans in order to take out new loans.

The loans borrowed could be of any form, including a car loan, student loan, home mortgage, or credit cards used to buy products.
Three credit agencies, TransUnion, Equifax, and Experian, determine your credit score. The credit score aids lenders in determining the amount of money you are capable to borrow and the interests your loans will have. The interest refers to the extra-added money you will be charged on loan. You need to pay the interest along with the loan so that the lender profits from offering you the loan.

Credit As The Borrowed Money

If you have access to credit, this means that you can purchase something before you actually pay for it. The ability to borrow gives the borrower the flexibility to plan the purchases and pay for the purchase over some time. However, the borrower has to pay interest on the amount of purchase. Thus, it is advised to use the credit judiciously and make use of it to purchase only necessary items.

Your Credit

Your eligibility to get a loan is determined on three factors. Credit agencies and creditors look at these three factors to get your credit score. The three factors are often known as the three C’s of credit. The three factors are, namely, Character, Capacity, and Collateral.

1. Character:

This refers to your behavior to your debts. Evaluating character for credit score means analyzing whether you pay your bills and fees on time, carry a balance every month, or pay off lenders early. This defines how your behavior will be to loans in the coming future. Lenders pay attention to your payment history, credit history lengths, and the types of credits used.

2. Capacity:

Lenders check your existing loans, and on the basis of your debt responsibilities and income, they determine whether you are ready to handle a new loan or not. The lenders also take into consideration the amounts owed on different accounts and how much credit is available for you right now.

3. Collateral:

Collateral refers to something of value like a car, property, or jewelry to secure the repayment of your loan. In case of default of repayment, the creditor can seize your collateral as the repayment of the loan.
These three factors are a mandate for credit agencies in assigning you a FICO credit score. The FICO credit score ranges from 300 to 850.