Monday, 24 June 2013

How credit and credit scores work

How credit works:

When a consumer does not have sufficient cash to buy goods or services or to pay for other obligations, money is usually "borrowed" from a financial institution, bank or person (a credit provider).

In a normal credit agreement, three parties play a role: you (as the consumer), a credit bureaux and a credit provider.  When approaching a credit provider for credit or when applying for credit, a credit provider evaluates your income to determine whether you can afford the credit, put differently, whether you are able to repay the monthly instalments (repayment + interest).  Since the credit provider lends you money and gives you the opportunity to repay the money over a period, interest is charged.  The credit provider also obtain date from a credit bureaux to determine if you are a risky customer, based on your previous credit agreements.  The lower the risk, the better the interest rate.  Once you obtain a loan, the credit provider will also report all information pertaining to your loan to a credit bureaux which will have an impact on future applications for loans.

See the following article on bad credit records:

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