Get Out of Debt Now! -Why do We Need Credit Anyway?
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LOAN AND DEBT
Credit - It makes our world go around. Credit is the lubrication that keeps our
economy spinning. Almost every building that is built, every job that's created and
every auto that gets bought, does so on the back of credit. Credit allows businesses
to expand, upgrade and grow. Credit allows people to purchase homes, cars and
even businesses. People take out loans for every conceivable thing. Lately credit has
been in the news more than usual, due to the problems in the sub-prime mortgage
There are two main types of credit; secured and unsecured. Secured credit, as the
name implies, uses some form of collateral to secure the loan. The creditor signs the
title of an asset over to the lender in exchange for the loan. When the loan is repaid in
full, the title reverts back to the creditor. This obviously reduces the risk for the
creditor and typically results in a lower interest rate for the creditor. Examples of
secured credit are home mortgages and auto loans. These types of loans normally
have much lower interest rates than the standard credit card or store charge card
Unsecured credit does not have any collateral backing up the loan. The creditor uses
only their good name and the promise to repay the loan. The risk to the creditor is
substantially greater than they face with a secured loan. As such, the interest rate is
higher, sometimes dramatically so. The lenders use a number to reflect the relative
risk a creditor poses. This is known as the credit score, or FICO score. The interest
rate on unsecured credit is based largely on this score. The credit score is compiled
using information drawn from the creditor's credit report. Many factors are
contained in the report. You can get an explanation of your credit report here.
It is possible to get credit without the lender checking your credit report. That
however assures you will pay a still higher interest rate and possibly a fee. That
reflects the additional risk encountered by the lender by giving a loan without the
information provided by an individual's credit report. They still must assess the
amount of risk presented by the prospective creditor, yet that task is more expensive,
difficult and time consuming without the information contained in a credit report.
Individuals most likely to avail themselves of such loans are self employed people
with relatively high income, but a very limited credit history or unverifiable income.
New high school or college graduates with a great job, but no credit history may also
use this type of financing. Of course some people who just have plain bad credit may
want to use this type of loan as well. Checking their credit would do them no good
Many business loans, such as SBA loans, are secured by both the creditor, through
the form of a lien on some real property, and the government, in the form a
guarantee to the lender. The lender is thus ensured that if the creditor defaults on the
loan, they will be able to sell the property to recoup their investment. In case that is
impossible, the loan is insured by the federal government.
A similar situation exists with credit in the form of student loans. In most cases,
these are unsecured by personal property, but are insured by the federal government.
In the case the creditor fails to repay the student loan, the government will repay the
lender the unpaid loan balance.
The world's economy is driven in a large part by credit. Without credit, most
businesses would be unable to finance growth, invest in upgraded plant and
equipment or finance research needed to produce new products. Few individuals
would be able to purchase homes, so the residential construction industry, especially
the small builder that employs 1-10 people, would not thrive as it does today. Most
residences would be large, government owned, multifamily units built by giant
construction concerns. All the jobs created by credit-driven building, expansion,
research, product distribution, and new equipment sales and manufacturing, would
cease to exist.
Obviously, this would cause an economic slowdown. The effects we're seeing in the
world's economy today are a direct proof of the importance of credit as a financial
lubricator. The credit markets are very restrained, so businesses and individuals are
making many purchases and leases they otherwise would.
So, credit is a good thing for the economy. Without credit, both business and
personal, the world would face economic decline. You just need to be sure your
personal credit picture is as advantageous as possible. Your first step is to determine
just what your personal picture credit is right now. To do this you need to get a copy
of your credit report from one or all of the credit reporting agencies. You can get a
copy of your report for free by clicking here now.
Credit Quote -
"Remember, credit is real money."
Obviously Franklin knew about more than just stoves and electricity. His observation
on credit is just as valid today as it was over 200 years ago, when he said it.
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