Getting Credit Where Credit Is Due

In order to take full advantage of credit issuing and reporting process, you have to have a very clear understanding of exactly what credit is and why it is so important.

Credit, by my definition, is the extension of financial resources to you by another party with the contractual agreement that you will repay the specific portion of the credit you use (with interest). Credit can be obtained with collateral or without it. Obtaining credit of itself does not create a debt. You become indebted when you use the credit. For example, if a lender lends money to you for the amount of $10,000.00 (the amount is irrelevant) and you use all $10,000.00, you have created a debt position with the investor for that $10,000.00. But, if you only use $1.00, you only pay back $1.00.

On the other side, you can use credit to prove yourself a good credit risk. Credit is an business unto itself, so you have to realize that if you handle credit well, you get more of it. The more you demonstrate that you are able to adhere to and meet the clauses of the contract, the more exposure the investor will be willing to take with you. Essentially, lending is comparable to gambling. The investor basically gambles (based on certain calculated risk factors) how much you will be able repay. To the investor, this "gamble" is considered an investment. Why? Because the amount of the primary advance will come back with profit. Banks loan you money and you pay them to do it.

A very simple definition for interest is this: Interest is money made by the lender on money they loaned to you. For instance, if you borrow $100,000.00 and have to pay back $110,000.00 according to the terms of the contract, you are paying $10,000.00 in interest. The investor, whether private party, corporation or bank, made $10,000.00 on that deal.

The best thing you can do for yourself in order to build and maintain an excellent credit record is to educate yourself what investor's look for in future "investments". Lenders do not look at you as a person. When you consider buying anything on credit, including houses and cars, you have to understand that your life is literally reduced to numbers. This is the sad truth about how the system works. It is a business and the business has nothing to do with you. It is not subjective which is human nature, it is unforgivingly objective. Every dollar of credit extended has to be repaid with interest in order the business to work. In order to master the system, it is essential that you learn what lenders (investors) look for, and become strong in those areas. Credit is not personal, it's business.

Don't ever let anyone judge you as a person based on your credit report. You are not defined by your credit. Credit is a financial tool, not a relationship-building tool. If you purposely abuse the credit system, that's one thing. But, you may simply not understand the system or have just had various circumstances beyond your control knock you out of the game. Don't be discouraged. Educate yourself, master the system, and get back in the game.