It is becoming more difficult in everyday life to function without access to credit. Most internet transactions are by credit card, phone orders are usually by credit card and booking a range of goods and services (eg restaurants, theatre, hotels, flights and cinema) are also by credit card. Because of the convenience for the customer and the guarantees it provides the providers, this is a growing trend. Often, if you do not have a credit card you cannot access these goods and services easily and often incur additional costs.
Beyond the everyday is the large occasional purchase such as a car or a house. In these cases it is long term financial arrangements that are entered into. Often in these situations, loans are offered on a secured basis, with house purchase this will be in the form of a mortgage. This means that the asset the loan monies are to be used to purchase are promised to the lender in the case of loan default. In this situation, the lender will take ownership of the asset and sell it to recover outstanding monies owed. If there is a surplus, it is returned to the original borrower.
In deciding whether or not to approve a loan application, the lender will consider the risk attached. The lender will want to ensure that the loan monies will be repaid according to the repayment schedule. It makes this evaluation by considering a range of evidence such as proof of income, asset equity and credit history. A number of companies use credit records which provide details of a person’s credit history. What they are looking for is a history of repayment of monies borrowed. If you do not have a credit history, there is no evidence of you being a good (or bad) financial risk. If you cannot provide such evidence, credit and loans will be difficult to obtain, as loan companies will consider you a poor risk.
Establishing a credit history is fairly straight forward, through the use of credit cards and other personal loans. But it is not always by behaving responsibly that a good credit history is built up. For example, if you use a credit card and pay the full balance each month, the credit card company do not have an opportunity to charge you interest. They may, therefore, consider that you are not someone with whom they wish to lend money since their return will be small. They would prefer a customer who kept an unpaid balance on their credit and who also pays regular instalments by the due dates.