What is Credit History?
When an individual of an organization takes a loan, the lenders routinely send information to credit rating agency regarding their relationship with the borrower. Normally the information is sent every month and includes lot of relevant data. This data could include the history of how the borrower has made repayments, the credit limits assigned to the borrower, any legal or other action taken by the lender against the borrower and so on. The credit history basically shows how the borrower has fulfilled his obligations as a borrower.
The credit history of a borrower could be good or bad. If the borrower has followed the terms that cover the sanction of loan or debt, his or her credit history will be good. However if the borrower has violated any of the terms, this will be recorded and the credit history will get a hit. More violations will worsen the credit history. These violations could include default in payments, untimely payments, or any other bad conduct by the borrower. In case the lender has had to resort to actions against the borrower, this will appear in the credit report and will go against the borrower when he tries to take a loan next time.
When a borrower approaches a lender for taking loan, the lender will review the borrower’s credit rating, if credit history exists. Based on the credit report the lender will take decisions about extending loan and the terms that should be set that will be binding on both the parties. Obviously a bad credit report will discourage the lenders to give loans and set stiff terms if loan is sanctioned. On the other hand a good credit history will help the borrower raise finances without much trouble. It is in the long term interest of the borrower to maintain a good credit history.
Credit Rating or Credit Scoring
The credit history of a borrower could be quite lengthy if he has been a borrower for a considerable time. The lenders would like to know about the borrower in as much detail as possible. But going thru the credit report could be quite time consuming. Therefore rating systems have been devised that can indicate at a glance how much the borrower can be trusted and how much risk is involved in extending loan to him. The rating or credit scoring is a numerical figure and is arrived at after considering various factors. It is indicative of the borrower’s credit worthiness based on his credit history. The scoring helps lenders decide assess the likelihood of borrower’s ability to repay further loans. The lenders decide how much financial risk they are taking by giving loan to the borrower with a credit history.
In US the credit score varies from 300 to 850. In this popular scale of credit scoring higher numbers indicate good rating and as the number reduces the rating is considered bad. A good conduct by the borrowers like repayment of instalments in time increases their credit score. On the other hand events like late payments or trouble with the lenders reduce the borrower’s credit score. When collection agency activities are reported or there is judgement against the borrower the credit score falls down steeply. There is no “fixed” value that indicates “pass” or “fail”. It is up to the lenders to decide their own benchmark. They decide their risk perception depending upon their policies. Working with a credit score is much easier for them than ploughing thru the credit history of the borrower.
A good credit score can help the borrower to obtain loans on more favourable terms. Typically the lenders reduce their interest rate when approving loan to a borrower with good credit score. In case of bad credit score the lenders such as banks tend to increase the applicable interest rate. This is a way of off-setting higher risk they incur while giving loan to a customer with poor rating.
When a potential creditor refuses loan to an applicant, the creditor is obliged to give reasons why such a decision was taken. The creditor is also expected to reveal the name of the credit rating agency which prepared the report. The creditor is however not under any obligation to reveal their policy on how they interpret the credit score or what are their “cut-off” points.
Primarily three major credit bureaus - Experian, Transunion and Equifax – provide information for working out credit score. They jointly run a service called Annualcreditreport.com from which each American is entitled for a free credit report each year. This report will not have credit score which is available as an add-on on payment basis.
In case of Bad credit History
What do you do when your credit score is bad? One general advice is that you should attempt to improve your credit rather than going round the problem. It is best to face he problem head-on. The following site gives very good advice for managing bad credit history –
www.ftc.gov/bcp/conline/pubs/credit/repair.shtm
This is the website of Federal Trade Commission and gives extremely useful information and advice on credit repair.
There are many agencies that promise to repair your credit history and make other tall claims. You should be careful with such agencies and not fall into their trap. As the above webpage declares – self-help is the best help.
