WHAT USED to be loosely defined as trust or faith, the significance of the word credit has transformed into an entire industry, assembling countless participants from every industry and from every segment of the American economy.
Today, credit is an entity which is required for economic survival by nearly every American consumer and business alike. Credit is simply a measurement of risk a creditor such as a financial institution or a retail store places upon its customer. When this factor is determined, credit then becomes the ability for a consumer to borrow funds with the convenience of extending payment over time for a product or service. As a result, the importance credit plays in the economy is nearly immeasurable, and it has become the main player in an industry that circulates billions of dollars per day.
The Forces of Change
The industry of credit around the globe is directly affected by the environment in which it operates. External factors such as unemployment rates, the strength of a government’s currency against other global economies, and import/export ratios all affect the internal factors of the industry. Some of these internal aspects represent the interest rates creditors can offer, the credit limits and amounts of money able to be lent, and even the requirements for extending the credit itself. One thing for certain is the absolute uncertainty of the economy from day to day, and more so from year to year. Forecasters such as economists, financial advisors, and even governmental organizations like the Federal Reserve in the United States, constantly strive for innovative ways to improve upon their future predictions of the status of the economy. Unfortunately, the incalculable array of factors represents an impossible task. Credit therefore remains an ever-changing entity.
For the American consumer, for example, the driving force of each individual’s creditworthiness hinges upon a crucial item, or number to be exact. That number is a credit score. This valuable number directly establishes the creditworthiness of a consumer in nearly every instance. Credit scores are determined by the information on a consumer’s credit file, which in turn is displayed on a credit report. The higher the score, the better terms and conditions creditors will be able to offer. Around the world, the reports themselves are usually generated by entities known as Credit Reporting Agencies.
In the US, Equifax, Trans Union and Experian are the companies that represent the three main players in the industry of credit and are the ones responsible for compiling and storing the data that makes up a consumer credit report. This data is in the form of information received from creditors, who in turn supply the monthly results of its customer’s payment history. This sequence, through a proprietary scoring system, creates the credit score. Nearly every American consumer has a credit file and score stored in each of the three credit reporting agency databases. Currently, the average credit score in America stands at approximately 693.
The Impact of an Industry
The industry of credit links numerous participants and is completely cyclical in its structure. The primary suppliers in this industry are the consumers themselves. They fuel the economy through their purchasing power, and when cash purchases are not feasible, they turn to credit as the other option. The secondary supplier then performs its task, with lenders and creditors extending credit to the consumer, thus allowing for purchases of goods and services. Creditors charge a fee for this service in the form of interest, which covers the risk associated with operating on the basis of faith and trust. This progression allows for the distribution of goods and services by the manufacturers and retailers. Producing these items creates the movement of the economy as a whole.
The impact of credit can be realized in other forms as well. Common knowledge reveals that a credit score can determine the interest rate a consumer receives when financing a home, car, or education. It can also determine the creditworthiness of an entrepreneur seeking to finance a new business (or expand an existing one). However, few may realize their score can also be tied to the job interview process, the quotes received on various types of insurance, and even to an individual’s background check (for security clearances, etc.). In fact, it could be said that a single credit score can be the most important number in a person’s life today and may be a number that follows them everywhere and forever. With the industry of credit now spreading its wings into mainstream society, consumers are now facing the task of learning how credit works and what to do to positively affect their personal credit reports in order to take advantage of the system in place. Knowledge and education are the keys here and although the credit industry was formed for an entirely different reason, it has now been tasked to help in educating people everywhere, due to public outcry for information regarding how credit reports and scores are devised and maintained. Even the United States Government felt strong enough about it and mandated in 2003 that all Americans receive a free credit report from each of three reporting agencies each year.
One thing is certain; the industry of credit will continue to experience perpetual change as the landscape of every economy across the globe and its dependency upon alternatives to cash and bartering fluctuates. New and innovative lending and credit practices will continue to also dictate the future of the credit industry and its significance in the seemingly limitless chapters of every society around the world. It is for this reason people should be constantly vigilant of changes that could affect the ability to borrow money, open/expand businesses, negotiate interest rates, and become a minimal credit risk to those entities providing financing for the goods, services and capital required to function in personal and professional life.