How Does Credit Work?

What Credit Is Used For

Your ability to purchase or lease the things you don't have cash for is based on your current credit status. Most of the time, homes, cars and boats are purchased using credit. Booking reservations for hotels, car rentals and cruises requires a credit card. Credit scores are used to rate your insurance and rent you a house these days. Having good credit can be a very powerful thing, as you find you can do almost anything, go anywhere and buy everything you want. It can also get you into quite a jam if you don't use it wisely.

Obtaining Credit

If you are searching for a new home or car, or just applying for a credit card, the bank will run a credit report on you. The credit reporting agencies will send a copy of the report stating all credit accounts you have or have had, and they will each give you a score. That score will be a factor in determining if you are approved, denied or charged a higher interest rate for the credit. Other factors include your employment history, current income and debt-to-income ratio. Most banks issuing credit will ask for proof of these things, while credit card companies usually just take your word for it. These factors are used to determine you credit worthiness and ability to pay back the loan.

Repairing Bad Credit

The first step in repairing your bad credit is to get a copy of your credit report. If you have recently been denied a loan due to your credit, you can request copies of the credit reports from the credit-reporting agencies. The addresses will be on the denial letter. Repairing credit takes some time; there is no quick fix. Check your report for any false information. If you find false information, call and write to the credit reporting agency and have them remove it. If you have high balances on your credit cards, pay off the smallest balance and then use that payment along with your regular payment to start paying off the next. Keep this up until you have paid off most of your cards and have lower balances on the rest. Check with your state to see what the limits are for reporting negative information. In some states it's 4 years, and in others it can be as high as 7. Bankruptcies are usually allowed to stay on the credit report for 10 years. If there is any negative information that is older than your state allows, write the reporting agency and have it removed. Older credit problems do not necessarily mean denial of new credit. Stay on top of it, and order new reports about every 6 months to check that your score is getting better. If you keep working at it, you can greatly improve your credit score and be able to finance what you want.