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Credit Basics
The First Step - Applying for
Credit |
Lenders look at more than
just personal information when you submit a credit or loan application. Your request is
subject to other criteria that evaluate your ability to repay.
The Three C's
1. Capacity. Based on your current debts and income, will you have the
capacity to repay? Your length of employment, type of job, and credit payment histories
are all factors a lender will look at in determining your ability to handle debt.
2. Collateral. Do you have assets creditors can take from you if you
don't maintain payments on your debt? Included in this list is anything of considerable
worth such as a home, car, or boat.
3. Character. What type of financial character do you display? For
lenders, signs of stability include owning a home (they know where to find you if they
have to collect) or maintaining a long residency.
Your Credit Score
Lenders have developed a magical formula for determining whether you should be given
credit or not. It's called a "credit scoring" system -- a statistical summary of
your credit file calculated using raw data and other models. One can only guess how a
credit score is really measured. Factors likely to encourage a favorable score might
include home ownership, a decent paying job, college education, or a solid payment
history.
Credit scoring is usually more reliable than other
subjective methods. A computer simply looks at an individual's application, assigns points
based on their information, then makes a comparison with other persons having the same
credit profile.
If you're turned down for credit because your credit score is too low, you might want to
ask the creditor what criteria were used to assign your score and the best ways to improve
your application. They may be able to help.
Protecting Your Consumer Rights
Take a look at two important consumer credit laws that affect your ability to apply for
credit -- the federal Truth-in-Lending Act and the Equal Credit Opportunity Act.
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