Interest
Let's assume you need a loan to buy a car. In the business world, one of the conditions for the loan is for you, the borrower, to pay a certain amount of money, called interest. This is the amount of money you would have to pay in addition to the original amount of money originally provided by the lender. This is how lenders make their money.

Interest is almost always based on a percentage of the original amount borrowed (called principal). For example, if the interest rate is 10% on a loan for $20,000, then the amount to be paid back to the lender in addition to the $20,000 is $2000. So once you would have paid off the loan, the amount that you would have paid will be principal + interst, or $20,000 + $2000, which works out to be $22,000.

Secured Credit vs. Unsecured Credit
There are two different types of credit, secured credit and unsecured credit. Secured credit means that the borrower has collateral (money, house, car, etc.) to offer so that the lender can claim ownership of that collateral if payments are not being made and the contract must be broken. If the borrower defaults (decides to break the contract) on the loan, then the lender can sell the collateral and apply the amount of that sale to the debt. Most of the time secured loans have a lower interest rates because of the borrower's collateral.

Unsecured credit means collateral has not been provided by the borrower. So the lender must use the borrower’s credit history alone as a basis for judging whether the loan should be granted to the borrower. With this in mind, the lender will look at a borrower's past loans and his/her payments on those loans (credit history). This kind of information is accessed through a credit report, and helps the lender decide whether the borrower is likely to repay their debt.

Credit Reports
Whether the loan will be approved or not depends on the borrower’s credit. Most of the time the lender gets a credit report to look at the applicant’s credit score. Using this score, they make a decision about whether or not to give a loan to the borrower.

A credit score is a 3 digit number between 300 to 850. It represents several different factors concerning a person's credit, including payment history, outstanding debt, length of credit history, number of inquires on the report, and the types of credit that the person already has. The list below explains many of these factors.

• Payment History - this factor makes up 35% of the score and is important because it shows how a borrower has paid their bills in the past. The score shows how many of their bills have been late and if whether they have been sent to collection agencies for any debts.

• Bankruptcy - this is an important factor because it stays on a person’s record for approximately 7-10 years, depending on the type of bankruptcy and whether or not the person is systematically working to pay off the outstanding debts.

• Outstanding debt - the amount of debt still owed makes up about 30% of a borrower's credit score.

• Charging the maximum - people who are always charging the maximum limit on their credit cards are considered more risky. This may lower their credit score.

• Length of Credit History - The amount of time a person has had credit counts for 15% of a credit score. The longer a person has had credit, the more can be understood about how they have paid their bills in the past.

• Types of loans - this counts for 10% and takes into consideration all of the types of loans that a person has, such as car loans, credit cards, or mortgages.

• Number of reports - the number of times a credit report has been requested counts for the final 10% of the credit score. Lenders are wary if a person often applies for a loan. High numbers of loan applications can make the person appear financially unstable and likely to go into quite a bit of debt.

  One of two types of inquiries are made when "pulling" a person’s credit report - hard inquiries and soft inquiries. A hard inquiry is made every time the person applies for a loan. Soft inquiries are made when you want to view your own credit report or when an employer views your credit report.

  If you are looking to buy a car or a house you may want to get your own credit report in addition to the lender accessing your credit report. It is wise to let the lender know when you are going call for a credit report yourself. The FCRA or the Fair Credit Reporting Act allows credit inquiries such as these to count as one inquiry if they are all done within seven to fourteen days.

FICO System
The FICO system, developed by Fair Isaac and Company, is the most commonly used system for scoring a person's credit. The system was developed in the mid 1980's in cooperation with the three major credit bureaus of Equifax, Transunion and Expirion. Each of the major credit bureaus uses their own variation of the FICO score. Equifax uses the Beacon system, TransUnion uses the Empirica system, and Experian uses the Experian-Fair Isaac system. Smaller lenders may also have their own scoring method.

If a borrower is able to get a loan, their credit score will dictate how low of an interest rate they can achieve. (Low interest rates are good for the borrower.) The credit report shows the lender the details of accounts a person has had in the past as well as accounts they have today. These details include the status, balance and timeliness of payments. Usually this information, be it positive or negative, stays on a person’s credit report for seven years. If the person declared bankruptcy, that will stay on a person’s credit report for up to ten years. So as an important note, you should avoid declaring bankruptcy if at all possible, since bankuptcy is very bad for a person's credit score. If you're having problems with your credit, seek help before making any major decisions like this.

The credit report also shows open lines of credit (active loans) as well. All of the information regarding your open lines of credit is sent to one of the three large national credit bureaus. These bureaus are Equifax, Experian, and TransUnion. Most of the large lending companies will report your credit information to all of these companies, but some of the smaller companies will only send your information to one of them. As a result, your credit report may be different with each company.

Since your credit report may be different with each bureau, it is wise to check your credit report once a year in order to make sure your credit information is correct and consistent among the three credit bureaus. An amendment to the federal Fair Credit Reporting Act (FCRA) entitles you each year to a free copy of your credit report from each one of the major nationwide consumer reporting companies.

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More on the Fair Credit Reporting Act
The FCRA also states who can and who can’t access your credit, and whether the reason accessing your information is permissible or not. This federal law was put into effect to protect the consumer’s rights. If there is an error on a person’s credit report, this law allows that person to contest it.

Ways to Help Your Credit Rating
If you have bad credit, you may feel helpless and you will never have good credit. The reality is that you can turn your credit around. The main thing is to be sure to pay your bills on time. Always pay at least your minimum payment, and whenever possible try to pay more so that you can pay off the balance of your outstanding debts. Also, it is a good idea to spread out the debt instead of charging the maximum on any one line of credit, such as a credit card. For example, it's better to owe $500 on three credit cards than it is to owe $1500 on one card with a $1500 limit. As mentioned before, "maxing out" your credit cards negatively affects your credit score.

Even if you don’t use a lot of your credit cards, be careful which ones you decide to close. Keep the oldest accounts open, since this will show that you've had credit for a long time. Also, don’t apply for credit unless you really need it. Remember that the amount of inquiries on your report can make a negative impact.

The Right to Know
If for some reason you are denied credit, you do have a right to know why it was denied. The lender is required by the Equal Credit Opportunity Act to state the exact reasons the loan was denied. However, you must inquire about within 60 days. Once you know the problems on your credit report, then you can then work toward resolving those issues and improving your credit.

The most important thing is that you are informed of what is on your credit report so you can correct any incorrect information and resolve any issues that are damaging your credit score. Knowing what is on your credit report and knowing your credit score will help you when you are applying for loans.

Help may be closer than you think.
If you are having trouble making payments on your credit cards, contact the companies. If you get paid at the first of the month and your due date is at the end of the month, the company may be willing to change your due date to a date that would work better for you. If there are other financial problems, they may be able to work with you on these issues, as well. But you will never know unless you call them and ask.

There is also the option of working with a financial counselor. Financial counselors can help you learn to manage your income more efficiently. They will help you explore all of your options and educate you on your rights.

Good luck!
At Carloaninc.com, we hope this information has been helpful. Remember, the power is in your hands to improve your credit. And when you have good credit, you'll be free to get a loan for that new car you've been waiting for!