How you get your financial reputation (your credit)

One of the most puzzling things to some people is how your financial reputation – your credit – gets "out there" for others to look at. Like any other sort of reputation, it is built upon your actions and your interactions with others. Other people share the information they have as a result of financial transactions with them. The credit card companies that issue you lines of credit, insurance companies, medical billing companies, lenders and sometimes even landlords, utility companies and employers, all report information to credit bureaus.

The sort of information that is reported to the three major credit bureaus (TransUnion, Experian and Equifax) all relates to your fiscal responsibility. This information can include the following items:

• Late payments.
• Your current credit limits.
• Your current balance.
• Number of times you have gone over your credit limits.
• Whether you are delinquent on bills, loans and credit accounts.
• Your place of employment.
• How long you have worked at a company.
• How long you have lived in one place.
• The types of loans you have.

When companies and others report this information to the credit bureaus, the bureaus use it to compile a financial profile. They assign you a score that makes it easier for others to ascertain your credit worthiness. They offer an easy way for companies and lenders to decide what sort of financial risk you are likely to offer.

Good credit

Good credit is preferable because it shows that you have a good handle on your financial situation. Good credit indicates trustworthiness and a sense of obligation to paying your debts on time and in full. If you have good credit, companies will see you as a low risk. As a result, you will be more likely to receive good loan terms (including interest rate) and you will be more likely to be approved in the first place. Since you are seen as more likely to pay back your debt, lenders will be more willing to let you borrow money.

Bad credit

On the other hand, if you have bad credit, your financial reputation is not very good. Lenders and others will see you as a higher risk. In fact, bad credit can do more than damage your chances of getting a loan. Some employers like to look at your credit history as part of the hiring process. You have to give permission for employers to access your file, but it can still make a difference. If you have bad credit, an employer might consider you a security risk: You might divulge company secrets through bribery, or you might be a potential embezzler. Your insurance premium can also be affected by your credit history, since risky financial choices may translate to other risks in life.

It is important to note that it is possible to get a loan or a credit card even if you have bad credit. But you must understand that lenders will see you as an increased risk, and take actions to limit the risk as much as possible. This includes insisting that you pay a higher interest rate than someone who has good credit. This is so that the lender gets as much money back as possible before a potential default on the loan.

Improving your credit

Most people, when they discover that their character has been tarnished, seek a way to fix the problem. The same is true of those with bad credit. Luckily, it is possible to fix bad credit and improve your financial reputation. However, it can take some time, and it requires effort and commitment. Here are some steps you can take to improve your credit:

• Pay your bills on time.
• Always pay at least the minimum payment.
• Try to pay down debt, reducing your credit balances.
• Do not apply for a lot of credit in a short amount of time.
• Do not exceed your monthly income.
• Avoid "bad" debt like payday loans, department store credit cards and title loans.

With some discipline and a change in attitude, it is possible to turn bad credit into good credit.