Credit is a part of our everyday lives. But let’s examine what credit really is, and how you can improve your utilization of it.
What is Credit?
The definition of credit is fairly straightforward. Credit is the ability to borrow money or access goods or services with the understanding that you’ll pay later. With it, you can still make purchases when cash is unavailable.
Lenders, merchants and service providers (known collectively as creditors) grant credit based on their confidence you can be trusted to pay back what you borrowed, along with any finance charges that may apply.
To the extent that creditors consider you worthy of their trust, you are said to be creditworthy, or to have “good credit.” This is considered financial trustworthiness.
How Do Lenders Determine 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 Old Way
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 creditworthiness. 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.
The New Way
With the establishment of the Cayman Islands National Credit Bureau, creditors now have access to complete credit reports that gather information from all sectors of the marketplace. These can include the financial industry, government departments, utilities, retailers, wholesalers, health services, construction industry and everything in between. 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. By having access to a credit report like this, lenders can rely more on your credit history details more now than ever before. It is for this reason that it is now more important than ever for you to ensure that you monitor your credit report at least once per year. You should always verify the accuracy of your credit report, as it is 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, beneficial rates.
Now That I Know What Credit Is, How Does It Actually 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 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.
Here’s the 4-step process to getting credit:
- Lender reviews important Information in your credit report, such as:
- The number of credit card accounts you have, their borrowing limits and current outstanding balances.
- The amounts of any loans you’ve taken out and how much of them you’ve paid back.
- Whether your monthly payments for your accounts were made on time, late or missed altogether.
- More severe financial setbacks such as mortgage foreclosures, car repossessions and bankruptcies.
- Credit Approval
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.
- Assignment of Credit Limit
If you are extended credit, an upper limit will be placed on the line of credit. 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.
Different Types of Credit
There are four main types of credit:
- Revolving credit – With revolving credit, you are given a maximum borrowing limit, and you can make charges up to that limit. You must make a minimum payment each month, but otherwise the amount you pay can be any portion of your outstanding charges, up to the full amount. If you make a partial payment, you will carry forward the remainder of your balance, or revolve the debt. Most credit cards count as revolving credit.
- Charge cards – Once commonly issued by retailers for use exclusively in their establishment, charge cards are relatively rare these days. Charge cards are used in much the same way as credit cards, but they don’t permit you to carry a balance: You must pay all charges in full every month.
- Service credit – Your contracts with service providers such as gas and electric utilities, cable and internet providers; cellular phone companies; and gyms are all credit agreements: These companies provide their services to you each month with the understanding that you will pay for them after the fact.
- Installment credit – Installment credit is a loan for a specific sum of money you agree to repay, plus interest and fees, in a series of equal monthly payments (installments) over a set period of time. Student loans, car loans and mortgages are all examples of installment credit.
Why Do I Need Credit?
Good credit is necessary if you plan to borrow money for major purchases, such as a car or a home. Or maybe you want to take advantage of the convenience and purchase-protection a credit card can provide. As a part of daily life, there are a wide variety of opportunities that may depend on some sort of credit relationship, or good standing.
Retail lenders are not the only ones that check your credit. For example, landlords may check your credit when deciding to rent an apartment or home to you. This helps them determine the security deposit amount. Your insurance provider may use your credit to determine rates for coverages. Utilities may check it before you can have power, water, and other utilities switched on. And, if you’re applying for a new job, your potential employer may use your credit report as part of their pre-employment screening process.
So, I’ve Established My Credit. Now What?
Now the ball is in your court. Remember, there are a few important considerations when managing your newfound credit line(s).
- 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.
- 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 a cell phone or other utility services.
- 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 it is something you can be proud of.
- Getting too far into 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 use credit sparingly to keep you out of debt.
Establishing credit is important for most aspects of our daily lives. While it’s one thing to establish credit, it’s quite another to manage and maintain it. Want to check your credit report? You can easily and securely order your credit report online, with quick turnaround (usually 24 hours or less). You can get your credit report here – Get My Credit Report.
CINCB has been established since 2002 to provide debt collection and credit reporting services. CINCB serves over 260 creditors locally and internationally with a local team of highly experienced agents ready to serve you. Services are delivered fully online at www.CINCB.ky. Contact us today to find out more.