The Ripple Effect of Consumer Credit

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From credit cards and auto loans to residential mortgages, home equity loans, and personal lines of credit, consumer credit facilitates the daily lives of millions of Americans by providing convenience and fiscal flexibility. This indispensable and valuable monetary tool offers numerous benefits including the following:

Ability to satisfy basic consumer needs Ease of use Opportunity to shop online in lieu of visiting merchants in person Immediate acquisition of merchandise and services and payment at a later date Elimination of the need to transport a significant amount of cash when purchasing expensive items Chance to improve one’s credit limit and creditworthiness by making timely payments and regular purchases Convenient shopping Potential to establish a credit history More effective budgeting via monthly statements setting forth all expenditures

Along with credit history, one of the most critical and determinative criterion in the financial undertakings of borrowers is the credit score, a three-digit number that is calculated on the basis of information contained in the consumer credit report. Credit scores typically range from 300 to 850; the score improves as the number increases. Lenders utilize this numerical figure, also known as a credit rating, to assess an applicant’s creditworthiness and ability to repay debts. Credit reports provide a detailed summary of a borrower’s credit information including the following: 1) amount of debt incurred, 2) frequency of inquiries made on his or her report, 3) timeliness of debt repayment (i.e. payment history, 4) balance or outstanding debt, 5) presence of bankruptcy or liens, 6) delinquent payments, 7) available credit, 8) length of credit history, 9) credit utilization, and 10) recent credit applications. The most important factor is payment history, which comprises 35% of the borrower’s credit score.

The maintenance of a positive consumer credit history is a sine qua non to financial stability. Credit scores play a pivotal role not only in loan or credit card approval, but also in the employment and insurance contexts, among other situations. With a high credit or FICO score, borrowers can obtain credit on favorable terms and the lowest interest rates, as well as avoid having to complete a substantial amount of paperwork. A poor credit rating, on the other hand, complicates borrowers’ chances to acquire any type of credit, and the loans that they do manage to qualify for boast an excessively high rate of interest. Lenders, such as credit card companies, are not the sole entities that request and review an applicant’s credit report. Credit scores and records are also sought by employers, landlords, insurance companies, utility companies, and cell phone companies, among others. They utilize the credit score to gauge the applicant’s degree of financial responsibility. The repercussions of bad credit can be witnessed in numerous aspects of borrower’s lives:1: Mortgage. Poor credit adversely impacts a borrower’s ability to obtain a mortgage. 2: Credit card. While borrowers with good credit benefit from a low rate of interest when applying for a credit card, those with poor credit are either disqualified or pay a high interest rate.

3. Insurance. When conducting a background check on a customer, home insurance companies often sound out the latter’s credit score. Both home and auto insurers utilize a prospective policyholder’s credit score in setting the premium. Individuals with a high credit score benefit from low insurance premiums and qualify for discounts. Applicants with poor credit are unlikely to obtain reasonable or attractive rates on insurance products. Generally, they can expect to pay hundreds of dollars more annually in insurance premiums. Furthermore, borrowers with a tarnished credit score may not be covered by underwriting guidelines, and their request for renewal may be denied. Insurance companies usually construct an insurance score by relying on the information in consumers’ credit report.

4. Employment. Prospective employers conduct a credit check prior to making decisions regarding promotion or hiring. Applicants with a poor credit score have a more difficult time qualifying for a promotion or getting hired.

5. Auto or home purchase. To acquire decent rates when buying a car or home, consumers need a good credit score.

6. Consumer credit. Credit history is a significant factor influencing lenders’ decisions to extend credit to prospective borrowers. To assess whether a particular applicant is a responsible candidate for consumer credit, a lender examines the former’s spending patterns and payment history. Defaulting individuals with a poor credit score may be subject to a penalty interest rate ranging from 25 to 30%. Pursuant to a policy known as universal default, borrowers who are delinquent in their payments with respect to one credit card will face higher rates on their other cards. Moreover, their credit rating will fall, which means that they will pay more to secure new credit and loans. Borrowers with a substantial outstanding balance and are in default are charged late fees and face accruing interest, hounding by collection agencies, garnishment of their wages, and/or liens on their assets. For many defaulting or delinquent borrowers, consumer credit counseling is a saving grace. Some of the services offered by organizations specializing in credit counseling include the following:

Proper budgeting Stress management Timely bill payment Debt elimination through low-cost debt management programs Financial management Review of credit reports Elimination or reduction of fees Lower monthly payments to lenders Cessation of calls from collectors

There are many steps that consumers can take to maintain a financially healthy credit score:

Stay current on their payments, for instance, by setting up automatic payments Obtain their credit report from the three consumer reporting agencies and review it for accuracy at least once a year (a corrected report leads to a higher credit score) Maintain credit card balances within 30% of their credit limit Establish a bank account (creditors view savings and checking accounts as proof of stability) Pay more than the minimum amount due