I get more questions about credit than anything else in the mortgage financing realm. What I have found is that most people have no idea what credit is, where it comes from and how a person gets a credit score. Thought I might write a bit about what I know about credit and answer those questions that most seem to ask.
What is credit? Credit actually has several different definitions depending on the context in which it’s used. For our purposes credit is a two part definition. For our first definition, credit is when goods or services are extended with repayment expected at a later date. To give an example, lets say you go to the mall, begin shopping and at checkout, the cashier asks you if you want to apply for a credit card. You give them your information and you’re issued a credit card. You purchase some clothes, swipe the card and leave with the merchandise. The store then sends you a bill with repayment expected either immediately or in payments over time. The store is now your creditor, you’ve applied for and been granted credit and how much you can buy is your credit limit. Now, to our second definition, credit is also how timely those payments are made over time. Your credit is the scorecard of your payments to everyone which you owe money. As Dr. Phil says, “past behavior is a good predictor of future behavior” and that in a nutshell is why your credit history is a very important part of your financial picture.