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The
Importance of Good Credit
May
14 , 2012
Atty. Ignacio R. Bunye
(First
of Two Parts)
In the
Philippines, the word credit is usually
associated with “utang”—thus
the ubiquitous “Your Credit is
Good But We Need Cash” signboards
in many of our local carinderia and
sari-sari stores.
Since
the word “utang” (debt)
has developed such a negative connotation
in Filipino culture, its English counterpart
has received a relatively bad reputation
as well.
However,
this should not be. Good credit, according
to the Financial Consumer Affairs
Group (FCAG) of the Bangko Sentral
ng Pilipinas, can actually be an asset
that can help fuel our future wealth.
CreditSmart
Asian defines credit as the ability
to borrow tomorrow’s money to
pay for something that we get today.
It is a promise to repay a debt or
obligation within a specified period
of time.
The
FCAG, in its Weekly Wealth Watch newsletter,
further explained that our ability
to honor such promise reflects on
our reputation and credibility as
individuals.
“The
more creditworthy we are, the more
attractive we appear to lenders, the
better our chances of receiving favorable
rates and terms, and the shorter time
it takes for our credit to be approved,”
the FCAG said.
In her
article “Why Good Credit Matters,”
personal finance writer LaToya Irby
described the various benefits of
good credit:
When
it comes to our home, mortgage lenders
want to be sure that we won’t
default on our payments and thus use
credit information to determine whether
or not to grant us the loan.
It can
help decide our suitability in applying
for a car loan, also the amount and
the interest of the loan.
Whether
we are purchasing a house or vehicle
insurance, our credit score will play
a role in determining the premium
we pay for these.
Employers
can check the credit history of potential
applicants to gauge individual sense
of responsibility.
For
those of us who are planning to put
up our own business, most business
startups require a sizeable amount
of cash that we may not have at the
moment. Having good credit can help
us to qualify for that much-needed
business loan.
The
FCAG explained that bad credit data,
as opposed to a good credit standing,
suggest that people who incurred them
are “more risky borrowers.”
Borrowers
with bad credit data are subject to
more expensive loans and fewer options.
They are also vulnerable to predatory
lenders.
Signs
of bad credit include failing to repay
loans, being late on payments, maxing
out credit lines, and filing for bankruptcy.
According
to the FCAG, lenders use a number
of factors to determine financial
trustworthiness: 1) income —
which actually determines if we have
the means to pay back credit; and
2) credit history — or how we
have used credit in the past, which
is one of the best ways to predict
how we will use credit in the future.
Credit
bureaus, or credit reporting agencies,
track our credit histories and related
information and organize these into
a credit report that financial institutions
can access and refer to anytime.
Another
essential concept to consider is credit
score, which is a very important number
that lenders use in determining whether
or not to extend credit and at what
interest rates and terms.
Our
payment history, total amounts owed,
length of credit history, new credit,
and type of credit used are all included
in the computation of our credit score,
the FCAG explained.
A general
rule to remember: the higher our score,
the more creditworthy we are perceived
to be.
(To
be concluded next week)
You
may e-mail us at totingbunye2000@gmail.com.
Past articles may be viewed at http://speakingout.ph/speakingout.php.
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