Most consumers have heard of the credit score and the various credit reports that are available. Many consumers understand that these files are based on a person's level of debt and the manner in which that debt was repaid to the lenders. There are other issues, though, that are less obvious to most consumers, yet they can have a profound effect on what is known as creditworthiness. This article explores some of the lesser known variables that affect a person's creditworthiness.
It is important for consumers to understand that debt is the fuel that runs the credit reporting machinery. If there were no debt there would be no need for repayments, and without repayment there would be no need for reporting. Every credit report is basically a log of debts incurred and the history of how those obligations were repaid. It reflects whether or not a particular loan was paid on time or if it was late. It details the consumer's income as compared to his or her outstanding loans. It contains personal information as well as any legal actions that may have occurred during the course of the report.
As you can see, debt is the catalyst. Debt and how it is handled during the course of any particular loan and all loans, in general, make up the factors that are used to determine a person's creditworthiness.
Of particular importance is the issue of timely payments. Failing to pay bills on time or not paying them at all can be one of the most detrimental entries into a credit report. In many cases, these late payments can stay in the credit report for up to seven years, and during that time, lenders will take their inclusion into the report as red flags and warnings.
Another issue that is used to determine a person's current creditworthiness is the amount of debt that a person has as it compares to income. It goes without saying that the more income a person has the more debt that person is believed to be able to carry. The same is true conversely: the less income a person has the less debt he or she should be taking on. The debt-to-income ratio can vary, however, and there is no one set limit that governs loans at all times. Generally, the tighter the credit market is (meaning lenders are willing to take fewer risks) the lower the number will need to be in order to secure a new loan.
One of the best ways to improve creditworthiness overall is to pay off loans on time. This not only shows lenders that you are financially able to make your payments but it also lowers the amount of current debt that you have on file. This decrease in your overall debt will lower your debt-to-income ratio, which is a good thing.
Creditworthiness can also be improved by communications with the lender when things begin to go wrong. Consumers are allowed to include written statements of excuse for those occasions when they may have been in financial straits. Lenders do not have to give these statements any weight but many will do so especially if supporting documentation is included with the consumer's statement.
Well it basically boils down to this. Good debt puts money in your pocket after you have paid for the debt (interest), and bad debt takes money from your pocket on an ongoing basis. In todays society, the world has gone through an explosion in bad debt. In the United States for example, for every $1 a person earns, they spend $1.20. In Australia things are getting worse too. We spend $1.02 for every dollar earned. Back in the 1980's we would earn $1 and save 20c.
The single most influencing factor in this curse of bad debt is the credit card. It is so easy to get a credit card these days, and even school kids have them. Most people I know have several of them, and you know what, they max them all out. People get caught in this vicious circle of paying one card off with another, and still the interest bill compounds at an alarming rate.
It is not only credit cards that are doing the damage, it is also the ability to get three years interest free furniture and home appliances with no money down. This is a huge trap, and when people live beyond their means and do not have the means to pay back their debt in the given time they are hit with massive interest rates and so the cycle continues.
So that is bad debt, and I didn't even include cars, holidays and clothes, all charged up on your card! You get the picture.
Now onto good debt. Personally, I love good debt, and any wealthy person will tell you the same thing. With good debt you can purchase income producing assets that put cash in your pocket, even after the interest bill is paid. Some examples of this include property, shares and stocks, and your own business. It even includes things such as art, wine and other rare collectibles.
By leveraging other peoples money to buy such things, you are after a time able to put yourself into a fantastic financial position, and you can now begin to pay cash for those bad debt items like expensive clothes and exotic holidays.
When I was at school there was never any lessons on good and bad debt, and I'm pretty sure they still do not teach effective money and debt management. It is unfortunate that in a society such as ours, that the government does not teach this to every man, woman and child as it has a massive impact on our lives. Just look at the sub prime fallout in the States to see how people who overextended themselves are now really in trouble.
There is a way out if you are in bad debt, and there are resources out there to financially educate yourself before you do get into any trouble.
We only have ourselves to rely upon to shape our financial future, and the longer we leave it the harder it gets. Eradicate the bad debt from your lives, and begin to live without that heavy weight around your neck.
Both Peter Kenny & Clint Maher are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.
Peter Kenny has sinced written about articles on various topics from Credit Cards, Finances and Best Money Market. Peter Kenny is a writer for The Thrifty Scot, please visit us at and. Peter Kenny's top article generates over 368000 views. to your Favourites.
Clint Maher has sinced written about articles on various topics from Internet Marketing, Personal Finance and Finances. Clint Maher is committed to helping others achieve their own personal greatness by giving them the tools and inspiration to do so. For further information please go to. Clint Maher's top article generates over 3600 views. to your Favourites.