Bad Credit Avoidance

Credit is something that can either make you or break you. It’s similar in its analogy to fire. If used properly credit can make you life much easier by providing cash when needed and added convenience however if you let it go out of control it can literally be the death of you. In this day and age it is vitally important that you learn how to use, protect and unlock the secrets of credit in order to make the most out of the facility to better your own life.

Lets first take a look at where credit started. It was first invented by merchants who had high value items that needed to be moved in order for normal business and cash flow to operate properly. Some customers who did not have enough money to fully purchase the good would negotiate with the merchant for payment plans. This is where consumer credit starts. The merchant will allow for payment plans but attach conditions and interest to make it worthwhile for the merchant.

Below we will describe the importance of consumer credit in today’s day and age and how it is much more than just a final consumer product but also help any merchant up the payment stream.

Take a builder of homes who can now charge $400,000 for a home and make a small (by comparison) profit of 10% because he can move his houses fast due to the easy financing and loan options available to the general public. He can quickly sell the set of houses that he has built and move on to another project. If the general public did not have financing abilities then it would take him much longer to sell the houses as people would be forced to save up before they were able to purchase the house for cash. This however means that the home builder would not be able to sell the houses so cheaply because his money would be stuck in the project for much longer and he has to make equitable returns in order to survive. He would most probably need to sell the houses for $500-600k just because of the long wait needed to see a return from his investment.

This is the reason that loan companies are set up in the first place. Very few people have the financial ability to purchase a house for cash, especially with the cost of building a house skyrocketing. Instead consumers have no choice but to turn to companies that are specially set up to help home buyers to finance their purchases. Without these finance companies it becomes almost impossible for home buyers to purchase homes especially with the prices now. Instead you will see most people living in wooden huts. This is the reason that being a bank or a lender is such good business.

It is important to realize that there is a cost when it comes to credit and therein lays the problem. Although by initial glance to cost is much smaller than the benefit of having a facility to borrow, the cost can easily creep up on you if you are not careful with the management of the credit. This is where the management of credit cards are very important. The easy finance that it grants can literally bring out the spending monster in most people and push people over the proverbial bad credit edge.

Credit card form of financing actually sprung up in quite a different way than normal merchants and loans. Credit cards were actually cards that were initially held by store keepers to detail the spending of their customers who had a “tab”. Store owners knew that it wasn’t always possible to deal with cash especially with their return customers. The merchant would allow a period of 30 days or a month to settle their debts. Some patrons would be allowed to purchase their products on “their credit card” and agree that they will settle their payment at the end of the month.

Modern credit cards work on a system similar to what we have mentioned earlier however work on a revolving credit system. The theory is that you will never have to pay off the balance in full but only have a set limit on your credit and have to pay a set minimum on a monthly basis. The credit that you draw will then be charged a finance fee starting the month following the current statement. The problem with this system is that it is addictive and gives you the impression that you actually have that amount of money on credit to spend on unnecessary things. It will then lead to you loans which we'll cover in another article.

This is the exact reason why people get into trouble and suffer from a bad credit history. Research has indicated that the majority of people that get into a bad credit situation fall into it because of their inability to manage their credit card debt effectively. The reason is not so much the outstanding debt that they might not be able to pay but actually the revolving credit. If you pile up the debt and only pay off the minimum requirements then you will be charged an extremely high amount every month just for having the outstanding debt.

As en evolution to this and how many people that are actually indebt a form of reporting has to be invented so that proper monitoring and creditworthiness of each individual can be properly accessed before a “tab” is approved or a loan is given. It first of all started with an accounting firm that set about to uniformly access the creditworthiness of clients for banks but has changed to be a holder of almost all the credit reports of people nationally. This marked the growth of the credit bureau again, a story for another article.

Currently all lenders will pull up the credit report of their clients before they are approved of any loan product. There is no way to avoid this even if you want the smallest of loans. This is why having a clean credit history is so important nowadays. You can't get any loan or financing without it.

This is basically where all the troubles really began. When the credit bureaus started they slowly but surely managed to obtain almost all information about the financial foot prints of any person they wished. They sold themselves very well and managed to get the cooperation of almost all lenders. The lenders or any other organization dealing with the finances of individuals reported to the credit bureaus any financial infractions along with the accounts affected and soon the bureaus were able to compile a detailed report on the credit infractions an individual committed. The information would then be sold to other lenders or lending institutions that needed to determine if an individual was creditworthy for any loans.

The problem is that sometimes errors were made by these financial institutions in reporting to the credit bureaus properly. This created a situation where many thousands of people were given a bad credit reputation by mistake. There have even been reports that people were forced to go into bankruptcy or even loose their families because of these errors.

As with all things where private information is made available there are good points and bad. The benefits are that there are fewer events of bankruptcy and foreclosures because the lenders could properly evaluate the creditworthiness of individuals before a loan was approved. On the flipside those people who have made financial mistakes in the past would not be easily forgotten or forgiven. A bad credit report lingers around for a very long time.