The Importance of Good Credit (First of Two Parts)

MANILA, Philippines – 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)

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