Credit 101
In this section you will learn about:
- What is Credit?
- How Does It Work?
- Four Important Things To Know About Credit
What is Credit?
Credit is making a purchase today with the promise to pay for it tomorrow. Credit lets you make purchases when you don’t have cash available. Creditors must first believe that you can be trusted to repay the amount of credit you use before they consider extending credit to you. This is considered financial trustworthiness.
Lenders use a number of factors to determine your financial trustworthiness. The most commonly used factor is your credit history. The best way to predict how you will use credit in the future is to examine how you operated your credit facilities in the past. The Cayman Islands National Credit Bureau collects your credit history information and later reports it in the form of a credit report to creditors who are processing a credit application from you.
Because there has never been a credit bureau on the Cayman Islands, lenders have traditionally relied upon employment and salary to gauge your financial trustworthiness in conjunction with calling around to other creditors, usually within their industry, to determine your credit worthiness. In addition to this, lenders would typically require your credit line be secured by real estate or some other form of tangible collateral. Depending on how confident they felt with you, creditors might require you to have someone who does have favorable credit to agree to repay your charges if you fail to do so, a guarantor.
Although creditors make efforts to check credit by calling around, it is not complete because some fellow businesses do not share their information within their own industry nor does this method reveal information from other industries. With the establishment of the Cayman Islands National Credit Bureau creditors now have access to complete credit reports that gathers information from all sectors of the market place including the financial industry, government departments, utilities, retailers, wholesalers, health services, construction industry and everything in between. By having access to a credit report like this, lenders can rely more on your credit history details more now than ever before, and because of this it is more important now for you to ensure that you monitor you credit report at least once a year to verify the accuracy of you credit report. The reason is because your credit report will be your most important piece of collateral going forward. If you keep your credit in good shape, creditors will be more willing to do business with you at more competitive rates.
How Does It Work?
When you apply to a financial institution or other creditor you are establishing your credit. Creditors will use identifying information such as your full name and date of birth to look up your credit report with the Cayman Islands National Credit Bureau. In order to look up your credit report, creditors are required by law to get your permission first before inquiring with any other entity about your credit history. They do this by including a clause in the application for which gives them permission to seek, obtain and divulge credit information about you with any creditor, your employer, credit bureau or other person deemed necessary. In addition, they get permission from you for your other creditors to release your credit information with them to the creditor or credit bureau whom you are currently applying to obtain credit from. Once the creditor determines that you are a trustworthy borrower, then they will offer a credit facility to you.
The creditor will give you guidelines and/or terms and conditions for using your credit line once you have been approved. These documents include, but are not limited to, the cost of the credit line they are offering you, the frequency and amount of the payments to be made, and fees that will apply if your payments are made late.
The credit limit (the maximum credit you can use) you are offered by the creditor is based on your credit history and net income. If you exceed your credit limit you are usually charged with a monetary penalty, but refer to your credit terms for full details.
After you accept and utilize the credit line, the creditor will send you a statement of account which details the transactions made on the account along with any interest/service charges incurred during the period. As per your credit agreement with the creditor, you must make payments by the due date in the amount prescribed to avoid penalties.
Four Important Things To Know About Credit
1. Credit isn’t your cash yet
Credit is so easy to get and use that it is hard not to think of it as your cash. And that is exactly why you can get into credit trouble. Although you get what you want today because a creditor has extended you credit and you agreed to pay it off tomorrow, what typically happens is that you find something tomorrow that you need to buy and decide to get another line of credit to buy the item. Pretty soon you will have more lines of credit built up that you can not afford to pay off. This can happen to anyone even if you’ve been using credit for years.
2. Having good credit is important
Many people don’t realize the value of good credit until they need it and don’t have it. Credit is used for more than just credit cards. You need credit for buying or renting a home, getting a new job, and even for getting cell phone or other utility services.
3. Good credit takes time to build
You already know that good credit goes a long way in today’s society. So how do you get good credit? It is simple, avoid getting more debt that you can afford and pay all your creditors as agreed. This way creditors will see that you are a responsible borrower by the track record you build up over the years. This track record is recorded in your credit report.
A good credit report is something you can be proud of. Even if you have a less than perfect credit report you can still set a goal to make your credit report good because older credit history will be replaced with newer credit history. And if your more recent history shows that you have been responsible in managing your credit accounts, you will have successfully improved your credit report and is something you can be proud of.
4. Getting too far in debt can happen to anyone
It doesn’t take long to build a collection of credit accounts such as credit cards. Too many lines of credit makes it hard to keep up with your payments if you do not have the net income to match. In turn, too much debt can have a negative influence on your credit, because it makes you look riskier to your current and future creditors. Be prudent, make sound financial decisions and using credit sparingly to keep you out of debt.