Forward Planning: Do you have good credit, bad credit or no credit at all?

In a credit-crazy society like America, most people spend all their life on borrowed money no mater how much they earn and what they have in their bank account.

Indeed most Americans live on credit, paying practically all their purchases by installments. If the payments are made regularly and on time it means that you are disciplined and you will have a "good credit". If your payments are late or if you can't pay, you will establish a "bad credit" meaning that you are financially unreliable.

People with good credit are allowed to make larger purchases like homes or commercial properties, paying a down payment and letting the rent or the property revenue pay for the loan or the mortgage payment.

There are two advantages in the credit system, the first one is enabling ordinary people with a limited income to purchase what they can't afford to pay in cash, and the second one is to give an incentive and push people to be disciplined and systematic toward their financial obligations.

The second time my wife and I went to the U.S., working there and no longer living as students, we realised the importance of establishing good credit in such a society: having no credit at all or having a bad credit will force you to pay cash for everything you buy.

Every person in the U.S. has a social security number which is used by the credit bureaus that gather payments and financial transactions of million of people to establish an individual report maintained in a huge data system ready to be accessed by many.

If you need a loan, credit card, shopping department stores credit cards, renting a house or an apartment, getting insurance, getting a job, being elected for a political position, getting in business, etc., you have to give your consent for your credit report to be checked thus establishing if your are financially disciplined or have financial problems.

If you default in your monthly rent payment you could be reported to the credit agency and a negative remark will show in your credit report. Of course, you have the rights to have a copy of your report and may examine and dispute any existing discrepancy and ask for corrections.

Considering the impact it has on your life, it is important to maintain the best credit report possible and everyone should always check his/her credit report and make sure it is correct.

A typical person's credit report includes the following types of information:
Identifying information = like your name, nicknames, current and previous addresses, Social Security number, date of birth, current and previous employers.

Credit information = specific information about each bank account including the date opened, credit limit or loan amount, balance, monthly payment and payment pattern during the past several years. (This information comes from companies that do business with you).

Public record information = federal district bankruptcy records; state and county court records, tax liens and monetary judgments; and, in some states, overdue child support payments. (This information comes from public records).

Inquiries = include the names of those who have obtained a copy of your credit report for any reason.

Your having credit or not, good or bad, can define almost your entire life, deciding what you can buy, what type of car you drive and even where you can live. So we must ask ourselves the question: is this a good solution and do we need such a system ?

The writer is managing director of Gulf Insurance Consulting and a licensed insurance consultant and financial planner.