Personal Finance presentation, five C’s of credit, credit history, prepare to get financially fit by practicing personal finance. five C’s of credit five common categories that banks and other institutions might look at when thinking about offering credit offering financing offering loans, five C’s include credit history, that’s what we’ll be focusing in on here and future presentations, we’ll look at in more detail the other four C’s, including capacity, collateral, capital, and conditions.
So looking here at the credit history, first of the five C’s, your credit history is a record of how you’ve managed your credit over time. It includes credit accounts you’ve opened and closed, we’re thinking about the credit accounts that have been opened and closed over time. Obviously, there’s going to be information related to that from the institution’s as well as your repayment history over the past seven to 10 years. So this information is provided by your lenders.
So obviously, the lenders would they would need to collect this information from the lenders as well as collection and government agencies to then be scored and reported. So the credit history, why it matters? Why does the credit history matter? Remember, we’re usually thinking about this in context of trying to get a loan or trying to get financing either now, or in the future, you want to be thinking about this, even if you do not need financing. At this point in time, at some point, you may, and you’d like to basically have these five C’s be looking good.
So that whenever you may possibly need loans in the future, you possibly have the ability to do so or more likely would. So a good credit score shows that you you’ve responsibly managed your debts and consistently made on time payments every month. That’s basically of course what they’re looking for. If they’re trying to give you a loan, they’re looking for information to say that you have handled a loan in the past. Now note, you might think that if you didn’t have any loan in the past that that’s pretty good indication that you’re you’re handling your finances well,
and it is generally pretty good information. But generally, the way it’s gonna work is that if you have financing outstanding and have been able to pay off the balances consistently for it, they actually rank that higher oftentimes. So your credit score matters, because you because it may impact your interest rate term and credit limit. So obviously, these things that when these factors will play into what the institution, if they’re going to be given you financing will will do in terms of their terms, in terms of their rates of interest, that they might give you the term and the credit limit how much they might be able to offer you the term,
how long it might be outstanding and the rate, obviously, you would like to rate as low as possible, you would like as much flexibility as possible on the term when you’re trying to decide what terms would fit to you. And you would like to be able to at least qualify for higher credit limits in the event that you need them, hopefully not needing them. But if you do, you’d like to be able to do have that ability in the event that it’s necessary, the higher your credit score, the more you may be able to borrow and the lower the interest rate you could receive.
So note, of course, the institution measuring out risk and reward. If you have a better credit score that it’s more likely that you’ll be paying them back, they can put that into their calculation, and therefore charge a lower interest rate because they have lower risk, they have more security that you will pay that back. If not, then they have to hedge. And they’re going to hedge by increasing the interest rate so that they get paid, they’re earning more on it to verify to validate the added risk that would be involved in it. For example, with a good or excellent credit score, you might qualify for a lower interest rate and monthly payment on a loan.
That’s going to be the general idea, of course. So some examples out from you might have a general case like this, where if you’re looking for $15,000, and your credit status, we’re just going to rank it between excellent, good and fair might result in excellent credit getting an APR of 5% monthly payments resulting at the 352. Whereas if the credit score was good, they might have an APR of 10%. And that would result in the monthly payments of the 391.
And fare we possibly have an APR the 15% and the monthly payment at the 427. So clearly, if the that means that if your credit is not as good, and you’re looking for a loan, you have the higher APR, which means the costs of the loan are going to be higher the costs of the loan are higher, because the bank doesn’t have the same security that you’ll be able to pay back the loan, which is going to be risk that they’re taking on that typically will be flowing through to to the monthly payments that will be applied.
It can also basically play out in the types of loans that you’re going to have and how long the term of the loan that you might have as well. So how to get your credit report and credit score. So how can you look into this information, you can request your credit report at no cost once a year from the top three credit reporting agencies, which is Equifax, Experian, and Trans Union, there’s a link here that you can take a look at it, you can take a look and search for them in your favorite browser.
So when you get your report, review it carefully to make sure your credit history is accurate and free from errors. So it’s good to review your credit reports at least annually, they suggest to make sure that there’s nothing on there, that’s not you, you don’t have like an identity theft issue that’s going that happens that would hurt your credit score. It is important to understand that your free annual credit report may not include your credit score, and a reporting agency may charge a free a fee for your credit score. So you want to take a look at the report the free item and see whether or not on how you can then get your credit score options for the credit scores.
So what’s your credit score mean? So the credit score, then your credit score reflects how well you’ve managed your credits. The three digit scores, sometimes referred to as a FICO, or F IC o score typically ranges from 300 to 850. So 300 to 850, the official FICO or F IC o score, each of the three credit reporting agencies use different scoring systems, so the score you receive from each agency may differ. So it gets somewhat confusing to get into the weeds in terms of how exactly the credit score is going to be calculated. We can look at the general rules for them.
But note that you have different credit scores that could be offered by the by the agencies here. So we’ll talk a little bit about that in more detail in future presentations, credit score standards, the 760 m plus would be excellent, you generally qualify for the best rates depending on debt to income. That’s the dti, we’ll take a look at that in the future ratio and collateral. collateral value 700 to 759 is considered good, you typically qualify for credit depending on the dti, that’s the debt to income, we’ll talk about later and collateral value, but may not get the best rates at the 700 to 759.
The 621 to 699 is considered fair. And these are general categories. Of course, you may have more difficulty obtaining credit at this point and will likely pay higher rates for it. Because of course the institution is thinking more risk on that range. And therefore they’re going to have to compensate for that by increasing the rates, the 620 or below is considered poor.
Generally, you may have difficulty obtaining unsecured credit at that point in time, and would have to basically look into options to help you out with the credit possibly security possibly like co signers or something like that no credit score, you may not have built up enough credit to calculate a score or your credit has been inactive for some time. So obviously, having a score that is good would be good for the institution. If they don’t have the score, then possibly that’s better than not then having a low score,
but you don’t have the credit history that they would like to be leaning on and relying on as well. So if you’re in this situation, or if you if you have less than excellent credit, then you may be taking steps or like to take steps to improve the credit even if you’re not looking for a loan at this point in time, so that you can get a loan in the future when you need it or if you need it.
And just it’s of course added protection in the event of an emergency. If there’s some kind of financial emergency, you would like to be able to qualify for the credit in the event in that event as well. So it could be worth the time generally, to be picking up and being aware of your credit score even if the cash isn’t currently needed. At this point in time or even if you’re not foreseen the need for cash into the future. Still still good idea just for insurance purposes to pick up the score. Be aware of it.