Consumer Credit

Credit is a legally binding agreement between a borrower who receives something of value from a lender now and agrees to repay the lender at a future date. When credit is accepted and used it turns into debt. The amount owed after buying things with credit is debt, while the unused available value remains as credit.

Secured Credit
Credit/loan backed by an asset(s). The asset is known as collateral. Collateral acts as a guarantee the borrower will repay the loaned money to the creditor. If the loan is not repaid, the creditor can seize collateral.

Unsecured Credit
Credit where no collateral is pledged by the borrower to guarantee repayment of the loan. The creditor lends the money based upon the integrity of the borrower’s application and credit history.

Installment Loan
A loan of a specific amount of money borrowed for a specific purpose and is repaid in specific amounts over a fixed number of payments (installments).

Revolving Lines of Credit
A monetary loan from a financial institution for a specific amount that can be accessed by the borrower when needed. As the used portion is repaid, the funds are made available again as credit.

Fixed Interest Loans
Loans having a fixed interest rate throughout the duration of the loan, despite market fluctuations.

Adjustable Interest Loans
A loan where the interest rate on the outstanding balance fluctuates periodically across the life of the loan.

Obtaining credit can be an intimidating process for those with little or no credit. Many young adults began building credit with student loan(s), credit card, rent or mobile phone payments.

All account payments and amounts are reported to credit agencies and appear on your credit report. Consistent and timely payments indicate responsible borrowing. This most important factor in determining your credit score. A few late payments can greatly damage your credit.

Your credit report will also include delinquency, referral to collections or any legal actions against you. “Derogatory marks” can have a long-lasting negative impact on your credit.

There is also a variety of financial institutions from which to obtain consumer credit.

It may take years to establish “good credit.” However, it can be destroyed in only weeks. Accordingly, once credit is obtained, it becomes extremely important to monitor credit history, which is reported to consumer reporting agencies.

The Equal Credit Opportunity ACT (ECOA)

The federal law ensuring protection against credit discrimination based upon race, color, religion, national origin, sex, marital status, age or because an individual receives public assistance.

Credit Scores

  • A credit score is a numerical value derived from the analysis of data contained in an individual’s credit report.

    Five C’s of Credit

    The Five C’s of Credit is a system of evaluation used by many traditional lenders to determine the credit worthiness of borrowers and the risk of financial loss.

    • Credit Score ›
      A numerical analysis of an individual’s credit history in determining the reliability in repaying and risk of defaulting on a loan. The most prevalent credit score is the FICA Score.

      FICO Credit Score – Dave Ramsey Rant

    • Capacity
      An individual’s ability to prudently and effectively manage personal financial resources and affairs.
    • Character
      Solely a creditor’s subjective assessment of a prospective borrower.
    • Collateral
      A physical asset pledged by a borrower to a lender in return for a loan.
    • Condition
      The financial assessment of the borrower, creditor and economic environment regarding the interplay of assets, liabilities and the ability to survive future risk.

Credit Reports

  • Consumer Reporting Agencies (CRA) ›

    Consumer Reporting Agencies are independent third-party agencies that compile and publish data about consumers, and generate credit reports.

    Customer credit history (“tradelines”) comprises most of the credit report. Typical tradelines information includes creditor name, account number and status, and length of delinquency. Other data elements may include tax liens, judgements and over-due court-ordered child support.

    There are three national credit bureaus, however not all creditors report to all three bureaus.
    The three national credit bureaus are:
    Equifax ›
    Experian ›
    TransUnion ›

  • Fair and Accurate Credit Transaction Act (FACT Act) ›

    The federal law that entitles all consumers to request and receive one free credit report annually from each of the three national credit bureaus.

    It is prudent to request a credit report from one of the three credit bureaus quarterly to stay abreast of any possible changes and since all creditors do not report to all three bureaus.

    Fee credit monitoring/score checking is offered on demand through some credit card companies to their card holders for a nominal fee.