Mind on My Money: Black Personal Finance 101
Each day, more and more entities use your credit history as the basis of their decisions about you as a potential customer and by extension as a person:
What Is Credit?
So what is credit? Well, credit is defined as the provision of resources by one party to another where the second party doesn't reimburse the first party immediately thereby generating a debt.
In relation to personal finance, credit can be best described as a consumer's financial reputation as determined by their history of past borrowing and repayment habits. Credit can be understood as a system that potential lenders use in order to predict the likelihood of a debt being repaid.
Using the data contained in a consumer's credit report, a historical record of past and present debts and repayment history, to generate a credit score, credit reporting bureaus provide this information to lenders upon request. Using this information, creditors determine how much it will cost a consumer to to do business with them, or in some cases, if they will do business with them at all.
Good credit can entitle a consumer to receive favorable interest rates when purchasing a home or a vehicle. Good credit also qualifies a consumer for better interest rates on unsecured debts such as credit cards and personal loans.
Conversely, bad credit can result in a consumer being sentenced to higher default rates and consequently paying hundreds even thousands of dollars more on their debts than their good credit counterparts.
What is A Credit Report?
The consumer credit system's pond only has three fish in it. The consumer, the creditor and the credit bureaus. As the little fish in the pond, the consumer will usually find that a lack of financial education is akin to swimming around with their eyes closed.
A credit report is a record of various financial obligations both past and present. The information is provided by creditors to the three major reporting agencies on a monthly basis. Many creditors report to at least one if not all three. The three major credit reporting agencies are Experian, Transunion, and Equifax. These three companies don't share information between each other, so most consumers will find that the information contained in each companies' report differs somewhat.
So that there is no mistake, be aware that these national credit bureaus are not government departments that exist for the consumer's benefit. They are for-profit companies that pay their bills by providing your information to various interested entities. Credit bureaus maintain expansive databases with billions of pieces of financial data available for potential creditors analyze as a method of determining how risky a consumer may be.
Realizing that there was entirely too much information on the average consumer's file, creditors have developed credit scores as a shorthand method of determining risk. A credit score is a three digit number generated by the information contained in a consumer's credit profile.
Payment history, the type of account, an account's age, the balance on an account are all factors that are considered in the calculation of a credit score. Credit scores range anywhere from 300 - 800 points. For a potential creditor, insurance company, or even potential employer, the average individual is only as attractive as their credit score. These days a credit check is done on everything from a mortgage application to an application for new utility service.
next: Why Credit Matters