CREDIT APPLICATION PROCESS
To obtain a loan or credit card, you must prove that you are a good credit risk. Not everyone who wants credit will receive it. Lenders need certain information in order to make a decision about granting credit. They want to be assured of two things: your ability to repay a debt and your willingness to do so.
The Three Cs of CreditIn deciding whether to grant you credit, businesses consider three main factors, known as the three Cs—character, capacity, and capital.
Character refers to your honesty and willingness to pay a debt when it is due. If you have a history of paying bills on time, creditors believe that you are a good credit risk.
Capacity refers to a person's ability to pay a debt when it is due. The lender or seller must decide if you have enough income to pay your bills. If your income is too small or unsteady, granting you credit may not be wise. In contrast, your income may be high, but if you have other debts, you may not be able to handle more payments.
Capital is the value of the borrower's possessions. Capital includes the money and property you own. Your capital may include a car that is paid for and a house on which a large amount has been paid. A checking account and savings also add to your capital. The amount of capital gives the lender some assurance that you will be able to meet your credit obligations.
Credit ApplicationsWhen you apply for credit or a loan, the lender will ask you to fill out an application. A credit application is a form on which you provide information needed by a lender to make a decision about granting credit. Figure 18-3 shows an example of a credit card application. In addition to printed applications, some companies take credit card applications online.
One of the most important parts of a credit application is your credit references —businesses or individuals who are able and willing to provide information about your creditworthiness. Your
signature on the application gives a lender permission to contact your credit references to inquire about your credit record.
Your signature also indicates that you understand the type of credit and that the information you have provided is true. You need to fill out the credit application completely, accurately, and honestly. You should only sign it when you understand it and have provided the requested information.
Documenting Credit DataInformation provided on credit applications must be verified to assure its accuracy. Present and former employers can verify employment dates and salary figures. Banks and other financial institutions can report whether the applicants have the accounts they listed. Landlords can indicate how long tenants have been renting and if they pay their rent on time. Other creditors can report how an applicant makes payments on accounts.
You may list a personal reference because you do not have sufficient business credit references. The person you list can indicate how he or she feels you conduct your personal business activities. In each case, the reference helps the credit manager to get a better picture of you as a credit risk. The credit manager can then make an accurate appraisal of your creditworthiness.
Actions to Establish CreditBuilding a good record of creditworthiness can be important. You can begin while you are still in school. Trust and reliability are important in matters of credit. You can help to establish yourself by having a good record of grades and attendance. Both employers and lenders know that school behavior patterns tend to carry on later in life.
In addition, start a checking and savings account. If you keep a balance in each account, a lender can see that you can handle money. Making regular deposits to your savings account also suggests that you will be a good credit risk.
Some people establish credit records by charging small purchases. You may buy a sweater on credit and make the payments according to the agreement. This action is an important step toward proving you are a good credit risk. You may want to pay off your account within 30 days and avoid an interest charge. Either way, you will be building a good credit record.
Having a good part-time or full-time employment record also helps to start a favorable credit record. Changing jobs often does not look good. Being on a job for two or more years is a positive part of a good credit record.
Other information that lenders will want to know relates to your finances. You will need to report how much you earn, what kinds of savings and investments you have, and whether you have any other sources of income. A lender may also want to know about your reliability. In other words, they will want to know your occupation, how long you have been with your present employer, how long you have lived at the same address, and whether you own or rent your home.
To obtain a loan or credit card, you must prove that you are a good credit risk. Not everyone who wants credit will receive it. Lenders need certain information in order to make a decision about granting credit. They want to be assured of two things: your ability to repay a debt and your willingness to do so.
The Three Cs of CreditIn deciding whether to grant you credit, businesses consider three main factors, known as the three Cs—character, capacity, and capital.
Character refers to your honesty and willingness to pay a debt when it is due. If you have a history of paying bills on time, creditors believe that you are a good credit risk.
Capacity refers to a person's ability to pay a debt when it is due. The lender or seller must decide if you have enough income to pay your bills. If your income is too small or unsteady, granting you credit may not be wise. In contrast, your income may be high, but if you have other debts, you may not be able to handle more payments.
Capital is the value of the borrower's possessions. Capital includes the money and property you own. Your capital may include a car that is paid for and a house on which a large amount has been paid. A checking account and savings also add to your capital. The amount of capital gives the lender some assurance that you will be able to meet your credit obligations.
Credit ApplicationsWhen you apply for credit or a loan, the lender will ask you to fill out an application. A credit application is a form on which you provide information needed by a lender to make a decision about granting credit. Figure 18-3 shows an example of a credit card application. In addition to printed applications, some companies take credit card applications online.
One of the most important parts of a credit application is your credit references —businesses or individuals who are able and willing to provide information about your creditworthiness. Your
signature on the application gives a lender permission to contact your credit references to inquire about your credit record.
Your signature also indicates that you understand the type of credit and that the information you have provided is true. You need to fill out the credit application completely, accurately, and honestly. You should only sign it when you understand it and have provided the requested information.
Documenting Credit DataInformation provided on credit applications must be verified to assure its accuracy. Present and former employers can verify employment dates and salary figures. Banks and other financial institutions can report whether the applicants have the accounts they listed. Landlords can indicate how long tenants have been renting and if they pay their rent on time. Other creditors can report how an applicant makes payments on accounts.
You may list a personal reference because you do not have sufficient business credit references. The person you list can indicate how he or she feels you conduct your personal business activities. In each case, the reference helps the credit manager to get a better picture of you as a credit risk. The credit manager can then make an accurate appraisal of your creditworthiness.
Actions to Establish CreditBuilding a good record of creditworthiness can be important. You can begin while you are still in school. Trust and reliability are important in matters of credit. You can help to establish yourself by having a good record of grades and attendance. Both employers and lenders know that school behavior patterns tend to carry on later in life.
In addition, start a checking and savings account. If you keep a balance in each account, a lender can see that you can handle money. Making regular deposits to your savings account also suggests that you will be a good credit risk.
Some people establish credit records by charging small purchases. You may buy a sweater on credit and make the payments according to the agreement. This action is an important step toward proving you are a good credit risk. You may want to pay off your account within 30 days and avoid an interest charge. Either way, you will be building a good credit record.
Having a good part-time or full-time employment record also helps to start a favorable credit record. Changing jobs often does not look good. Being on a job for two or more years is a positive part of a good credit record.
Other information that lenders will want to know relates to your finances. You will need to report how much you earn, what kinds of savings and investments you have, and whether you have any other sources of income. A lender may also want to know about your reliability. In other words, they will want to know your occupation, how long you have been with your present employer, how long you have lived at the same address, and whether you own or rent your home.
CREDIT BUREAUIn addition to checking with your credit references, a lender will usually check with a credit bureau. A credit bureau , or credit reporting agency, is a company that gathers information on credit users. It sells this information to businesses offering credit. Banks, finance companies, and retail stores are among the customers of credit bureaus.
Credit bureaus keep debt records of consumers. They can record only information that is officially reported to them. For example, mortgage lenders and credit card companies report information about their customers. The information shows if payments are up to date or overdue and if any action has been taken to collect overdue bills. Credit information from other sources such as utility companies, collection agencies, and courts may be added to create a month-by-month credit history for the consumer accounts.
National and local credit bureaus cooperate with each other and share information. If you are new to an area, the local credit bureau can obtain information from the bureau in your previous community.
Credit ReportA credit bureau uses your debt records to grade you as a credit risk. Your credit report shows the debts you owe, how often you use credit, whether you pay your debts on time, and other credit data. All of this information is of interest to credit grantors. Credit bureaus do not make value judgments about any individual. The bureau simply gathers facts as reported to them.
The formats used by credit bureaus vary, but credit reports all contain similar information. Reports are usually divided into six parts: personal information, public records, accounts in good standing, adverse accounts, credit history requests, and personal statement. Figure 18-4 lists the main components of a credit report along with descriptions and examples for each component.
Your credit record is confidential. That is, only you or those who have a legitimate reason for examining it can obtain it. For example, when you fill out an application to rent an apartment, you might be asked to give the landlord or leasing agent permission to check your credit. The same is true when you apply for a loan or a credit card.
Credit bureaus keep debt records of consumers. They can record only information that is officially reported to them. For example, mortgage lenders and credit card companies report information about their customers. The information shows if payments are up to date or overdue and if any action has been taken to collect overdue bills. Credit information from other sources such as utility companies, collection agencies, and courts may be added to create a month-by-month credit history for the consumer accounts.
National and local credit bureaus cooperate with each other and share information. If you are new to an area, the local credit bureau can obtain information from the bureau in your previous community.
Credit ReportA credit bureau uses your debt records to grade you as a credit risk. Your credit report shows the debts you owe, how often you use credit, whether you pay your debts on time, and other credit data. All of this information is of interest to credit grantors. Credit bureaus do not make value judgments about any individual. The bureau simply gathers facts as reported to them.
The formats used by credit bureaus vary, but credit reports all contain similar information. Reports are usually divided into six parts: personal information, public records, accounts in good standing, adverse accounts, credit history requests, and personal statement. Figure 18-4 lists the main components of a credit report along with descriptions and examples for each component.
Your credit record is confidential. That is, only you or those who have a legitimate reason for examining it can obtain it. For example, when you fill out an application to rent an apartment, you might be asked to give the landlord or leasing agent permission to check your credit. The same is true when you apply for a loan or a credit card.
CREDIT DOCUMENTSCredit is important in many ways. Millions of consumers and businesses enjoy this privilege. No matter what kind of credit is involved, both parties have legal responsibilities.
You can help maintain a good credit record by keeping track of your purchases and payments. When you buy on credit, you should keep a copy of the sales slip, credit card receipt, or other documents. As you make payments by check, keep track of the date and check number.
Credit Contracts“KWYS” are four letters to keep in mind when signing any legal form. These letters stand for “know what you're signing.” This principle applies to all credit contracts. An installment contract is one of the most important forms you may sign. Before signing one, consider the following questions.
You can help maintain a good credit record by keeping track of your purchases and payments. When you buy on credit, you should keep a copy of the sales slip, credit card receipt, or other documents. As you make payments by check, keep track of the date and check number.
Credit Contracts“KWYS” are four letters to keep in mind when signing any legal form. These letters stand for “know what you're signing.” This principle applies to all credit contracts. An installment contract is one of the most important forms you may sign. Before signing one, consider the following questions.
- How much are the finance charges? Are they clearly shown on the contract?
- Does the contract include the cost of services you may need, such as repairs to a television or a washing machine?
- Does the contract have an add-on feature so that you can later buy other items?
- If you pay the contract in full before the ending date, will the finance charge be reduced?
- Is the contract completely filled in before you sign? Be sure to draw a line through any blank space before signing.
- Will you be given a copy of the contract?
- Under what conditions can the seller repossess the merchandise if you do not pay on time?
- The balance that was due when the last statement was mailed
- The amounts charged during the month
- The amounts credited to your account for payments or for returned items
- The current balance, which is the old balance + finance charges + purchases − payments
- The minimum amount of your next payment and when it is due
Accuracy of RecordsAccurate record keeping is a good personal business practice. Keeping accurate records will help you avoid credit problems.
Many errors are simply honest mistakes. Whatever the source of the error, you need to contact the business, explain the problem, and request a correction. Your creditworthiness may be at stake. Businesses are usually as eager to correct errors as you are. Bad publicity may also hurt the reputation of the business if errors are not corrected.
Avoiding FraudThe Federal Trade Commission reports that credit card fraud is a major problem. To avoid loss due to fraud, you should check your credit card account statements very carefully for errors.
Each month, you should check the accuracy of your statement by comparing it with your copies of credit card receipts. This includes the receipts you get from merchants and documents you print or save when you make online purchases. Verify payments and other credits, such as amounts subtracted when merchandise is returned.
If you discover an error on a statement, you should notify the business as well as the credit card company. Keep checking new statements to ensure the problem is resolved.
In some cases, your credit card company may contact you if fraud is suspected. This happens when charges being made on a card do not match the pattern of past purchases. Unusual product purchases or charges made in new locations often trigger fraud alerts.
To help prevent Internet fraud, online credit card transactions require account numbers, expiration dates, and printed security numbers. The data transfer is also encrypted.
Many errors are simply honest mistakes. Whatever the source of the error, you need to contact the business, explain the problem, and request a correction. Your creditworthiness may be at stake. Businesses are usually as eager to correct errors as you are. Bad publicity may also hurt the reputation of the business if errors are not corrected.
Avoiding FraudThe Federal Trade Commission reports that credit card fraud is a major problem. To avoid loss due to fraud, you should check your credit card account statements very carefully for errors.
Each month, you should check the accuracy of your statement by comparing it with your copies of credit card receipts. This includes the receipts you get from merchants and documents you print or save when you make online purchases. Verify payments and other credits, such as amounts subtracted when merchandise is returned.
If you discover an error on a statement, you should notify the business as well as the credit card company. Keep checking new statements to ensure the problem is resolved.
In some cases, your credit card company may contact you if fraud is suspected. This happens when charges being made on a card do not match the pattern of past purchases. Unusual product purchases or charges made in new locations often trigger fraud alerts.
To help prevent Internet fraud, online credit card transactions require account numbers, expiration dates, and printed security numbers. The data transfer is also encrypted.