Understanding the Essentials of Credit

When it comes to contractor license bonds, credit may not be the first thing you think about. However understanding the essentials of credit is crucial for parties looking to secure a bond.

If you’re a contractor embarking on an exciting new build, understanding the essentials of credit will help you find the best bond rate. Even if you think your personal lines of credit are limited, you likely have more flexibility than you think. Read on to learn more about the essentials of credit as it pertains to bonds.

What Is Credit?

“Credit” can be a broad, intimidating term, so let’s break it down. It can be understood in a few different ways. Most often, in financial terms, “credit” is a contractual agreement between two parties, in which one (the borrower) receives money or another item of value and promises to repay the other party (the lender) at a later time. Usually, the repayment accrues interest.

However, “credit” can also refer to an individual’s credit history — how well you’ve repaid debts. Both credit history and credit in its contractual form are important when it comes to lending and borrowing.

What Are Examples of Credit?

In today’s modern age, there are many examples of credit between borrowers and lenders. Mortgages, car and home loans, and lines of credit (LOCs) all constitute credit — but the most well-known form of credit, perhaps, is the credit card! Surety bonds, often used by contractors, are also a form of credit.

What Are Surety Bonds?

Surety bonds are made between parties to guarantee that financial obligations will be paid even if one party defaults. One party (the surety provider) is responsible for providing a line of credit to the principal party (for instance, a contractor), who promises to fulfill their contractual agreement (for example, completing a build per state laws).

The obligee (for instance, the client) is protected if the principal party fails to adhere to the contract. They can file a claim against the surety bond to receive financial compensation for any damages.

What About My Credit Score?

As mentioned, “credit” can also refer to your credit score. In some instances, taking out a line of credit can trigger a “hard check” on your credit report, which impacts your overall credit score. Luckily, Go Bonds uses a soft credit check for all license bond applications, which doesn’t affect your credit score or show up on any credit reports.

Usually, obligees with a high personal credit score will have a lower bond premium. Other aspects of one’s financial history, such as personal assets, will likely be considered when calculating a bond price and limit. However, bonds are still available to individuals and institutions with poor credit; the premium will just be higher as a result.