What are the
types of Credit?
In general, there are two types of credit you can obtain; secured and unsecured.
Secured credit means that the loan is backed by something of value. It could be anything that you own which the creditor views as valuable… in other words… “Do you have any collateral?” Or it could be the item you are purchasing itself like a car.
Basic Example: You get a loan to buy a car. It is a secured credit transaction; therefore the lender can, and will, repossess the car if you do not repay the loan in a timely manner.
Often you do hear of people being able to purchase a car even though there are negative items on their credit report. And this is exactly the reason why. They know where you live, they know where you work. They charge you a higher interest, on top of other extra fees! And on some level it is to their advantage if you don’t pay because they simply can come get the car and do it all over again with someone else… and still say you owe the outstanding balance for the defaulted loan. This is what secured credit, or collateral, allows creditors to do.
Even credit card purchases can be viewed as secured. This is because the credit card issuer can legally take back the merchandise you purchased if you default on the payments. But this is very rarely done with credit cards. The credit card issuer doesn't want your books or furniture, not to mention the meals and gas, etc. you charged on your credit card. So credit card issuers usually treat a default in the same manner as unsecured credit.
Unsecured credit means that you were lent money based on the strength of your signature. This is usually called a signature loan. There is no specific merchandise backing the loan, just the lenders belief that you will repay the money. They just give it to you and hope you are a person of your word.
What are the steps in getting credit?
The first step in getting credit is figuring out what you need it for. Are you trying to get a car, furniture, or something else? Generally, if it is a major purchase, your lender (the car dealership, home mortgage lender, etc.) will help you fill out all the paperwork. And they definitely will treat it as a secured credit application. They will want collateral, a co-signor, and/or require the merchandise itself be the collateral by placing a lien on it until it is paid.
If it is just a credit card or small loan amount you are applying for, often times they will treat it as unsecured credit. And rely solely on your signature and credit references.
As you probably already know credit cards is an enormous industry. You should shop around on your own. Find a bank offering a low interest rate. Ask them for a copy of their application. Then fill out all the information they are asking for as accurately as you can.
The lender will then use this information for two things. First, the application will be used to get a copy of your credit report from one or more credit reporting agencies. There are only three major credit bureaus in the U.S. Equifax, Trans Union, and Experian (which used to be TRW). Your local credit bureau and every other credit bureau in cities all across America is in some way affiliated with one of these three companies. In general, for larger loans, like a car or house, at least two of these three credit bureaus will be pulled… and for smaller loans, like credit cards, only one credit reporting agency will be pulled.
Second, your application, along with your credit report, will be used to "score" you. Creditors use a score to evaluate your creditworthiness. If you score high enough, you are granted the loan. If you score too low, you are rejected. If you are in the middle zone, it becomes a judgment call by the lender. If the lender feels comfortable about you, your marginal status will turn into an approval. If the lender feels uncomfortable with you, your marginal status will turn into a rejection.
Creditors like to see the following information listed on your credit application in order of importance to them when evaluating your credit request:
* Positive, up to date credit report
* Employment you’ve held for more than one year
* Address in your name, at the same place for at least a year
* Current, or paid off loans
* Master, Visa, AmEx, or Discover card
* Department store card