Credit is defined simply as “the provision of resources by one party to another party where that second party does not immediately pay the first party for the resources in full, thereby generating a debt, and instead arranges either to pay for or to return those resources at a later date.” The concept of credit has been around since the ancient times even when cash was still not in use and barter was the norm.

Nowadays though the word credit is synonymous with granting loans. Loans have become a common way to finance everything from the purchase of automobiles to houses and, due to the arrival of credit cards, even everyday items such as groceries.

Credit ratings

A credit rating is a measure used by creditors to determine how much they can trust a certain borrower, whether the borrower be an individual, a corporation, or a country. The credit rating is derived using past financial data or the borrower’s credit history. There are several factors that can affect the credit rating of an individual including:

#the person’s ability to pay a loan – Reflected by the person’s salary and other assets
#the amount of credit in existence – This is what credit limits are for. If the person is near his credit limit or has reached it it is harder to get a loan. This also reflects whether the person is in the habit of going into debt
#credit history – Shows whether the person makes payments on time. This also reflects the persons spending and saving patterns

A good credit rating is very important when it comes to applying for loans. A person with a poor credit rating will find it much harder to get approval for a loan than a person that has a good credit rating.

Exercising responsibility

Credit is a part of everyday life. It enables people to buy everything from necessities to luxuries. However, if you do not exercise responsibility in managing your finances you will find that the concept of credit will cripple you instead of empower you.

To make sure you exercise responsibility always keep track of your purchases, loans, and overall expenses. Keep yourself informed and do not fall for the “buy now pay later” mentality. Buy only what you need and if buying for luxuries make sure that it is planned and not a spontaneous buy. Pay your bills on time and do not allow yourself to go in debt.

In the end being responsible will not only yield in an excellent credit history but will also ensure that you will have more options for finding money fast in case you need it in the future.

Credit score ratings affect one’s ability to obtain anything from a car loan to a mortgage; from a credit card to a job. Yes, today even perspective employees have their credit scores checked before being hired.

The three major credit reporting agencies, Equifax, Trans-Union and Experian–along with most other agencies seeking a customer’s credit score–use what is known as the FICO system to determine a credit rating.

FICO

FICO stands for Fair Isaac Company, which came up with the procedure of scaling down credit information into a single three digit number. The lower a FICO score, the higher an interest rate will likely be.

FICO scores range between 300 and 850. The following is the scale used by lenders:

• 750 and over excellent
• 720 to 750 very good
• 660 to 720 acceptable
• 620 to 660 uncertain
• below 620 good luck

How FICO computes

Several areas of information determine the level of a FICO score:

• 35% on payment history.
• 30% on the amount currently owed to lenders.
• 15% on the length of time with a credit history.
• 10% on the number of new credit accounts opened OR applied for (the fewer, the better).
• 10% on the whole of credit accounts held (mortgages, credit cards, installment loans, etc.).

Raising FICO

There are a number of ways to raise a FICO score. Of course, paying bills on time is a no-brainer, but the following are some others that might help.

• A mortgage is the most important loan when managing a FICO score. Having it paid on time each month is a big must.
• Installment loans for things like furniture, appliances, etc. come in second.
• Keep amounts borrowed well below credit limits. Maxed out credit cards makes lenders nervous.
• Limit credit cards to three. More will decrease a FICO score, and again, make lenders get the jitters.
• Don’t apply for too many credit cards at one time.
• A permanent address, preferably an owned home, will help in FICO scores. Moving from place to place will lower it.

The importance of having a good credit rating will decide how well life can be lived. FICO scores establish more than just whether one can obtain credit, they also determine interest rates, down payment amounts, which mortgage can be used when buying a new home, the ability to get a car loan, premiums on auto and homeowners insurance, and how well one will be accepted into the workforce.