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No matter how colorful your personality is and regardless of how much you’ve got to offer to the world, your creditors (people or companies you borrow money from) will only look at you as a prospective debtor (a borrower of money) and make credit checks. And that means that whoever you are, you are just as good as your credit.
Transactions such as buying a car or a house on credit, applying for a cash loan, or purchasing an insurance policy often involves thousands of dollars necessitating the need for companies to take measures ensuring its smooth facilitation.
But what’s with all the fuss? What can possibly go wrong with these transactions?
To answer the second question: a lot.
To answer the first, it would be useful to first consider the value of information. Additional information allows us to make better decisions. Had you known that it would rain this afternoon then you would not have worn your new pair of suede boots to work. Or you would not have taken the freeway knowing that there was a freak accident there.
When you are say, applying for a loan, the bank initially knows hardly anything about you and so it would not be able to make a smart decision on whether to approve your application or not. As much as it is a major step for you, it is also a big decision for the bank for who knows if you’ll actually be able to return the money that you are planning to borrow.
And besides, the fact that you’re borrowing money from the bank means that you’re not just talking about $100. So the bank takes certain initiatives to assess your application and it usually does so by doing an inquiry of your credit record – it orders credit checks.
Credit checks allow companies that you are transacting with to have access to your credit history. With your consent of course, credit checks can be ordered by any company providing them with information on all of your credit accounts during the past two years and how you were able to pay them. They also show credit inquiries you had during the last two years; judgments and liens, seven years; bankruptcy, 10 years; and unpaid tax liens, 15 years.
Access to all of these information minimize the risks associated with transacting financial matters with you – the most basic risk being that you wouldn’t be able to meet your obligations. They also influence the terms and conditions of your transaction. If your credit history is good then you’d most likely get a favorable one with lower interest rates and a higher credit limit. Otherwise, you’d probably be charged rates or they could choose not to accept your application at all.
It used to be that credit checks were only used to assess applications for house mortgages, auto loans, cash loans, and insurance policies but now, they are also becoming a popular tool to screen prospective employees and lessees. For the former, it’s used by the company to check your trustworthiness and the risk that you’ll runaway with their money especially if you’re applying for a position that directly handles company funds.
For the latter, it’s essentially employed to see if you’ll be able to sustain the rent with your current financial status. These uses of credit checks are quite controversial these days as some claim that they are an outright invasion of one’s privacy. Nevertheless, these go to show how people really value information and how much it means in decision-making.
Your credit is probably the only thing that will matter if you want a house, a car, or a loan so knowing that, you should make sure that it is as good as everything else that matters to you in life – for smiles and a great personality mean nothing to your creditors.
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