Loans description
A consumer or business' credit
history is regularly tracked by credit rating agencies.
The data reported by these agencies is primarily
provided to them by creditors and includes detailed
records of the relationship a person or business has
with the lender. Detailed account information, including
payment history, credit limits, high and low balances,
and any aggressive actions taken to recover overdue
debts, are all reported regularly (usually monthly).
This information can be quite detailed and arduous to
navigate by a potential lender dealing with a new
applicant. To address this issue, credit scoring was
invented.
All credit bureaus also offer a supplemental service
called credit scoring. Credit scoring is the process of
using a propietary mathematical algorithm to create a
numerical value that alleges to be a total picture of an
applicants creditworthiness. Scores, based on numbers
from 250-800 are alleged to statistically analyze a
credit history, in comparison to other debtors, and
gauge the likelihood of the magntitude of financial
risk. Since lending money to a person or company is a
risk, credit scoring offers a standardized way for
lenders to assess that risk rapidly and "without
prejudice."
Credit scores allege to assess the likelihood that a
borrower will repay a loan or other credit obligation.
The higher the score, the better the credit history and
the higher the probability that the loan will be repaid
on time; this theory purports. When creditors report an
excessive number of late payments, or trouble with
collecting payments, a "hit" on the score is suffered.
Similarly, when adverse judgements and collection agency
activity are reported, even bigger "hits" on this score
are suffered. Repeated hits can lower the score and
trigger what is called; a negative credit rating or
adverse credit history.
The information in a credit report is sold by the credit
agencies to organizations that are considering whether
to offer credit to individuals or companies, it is also
avaiable to other entities with a "permissible purpose."
The consequences of a negative credit rating is
typically a reduction in the likelihood that a lender
will approve an application for credit under favorable
terms or at all. Interest rates on loans are often based
on credit history in an almost backwards-intuitive
way--the higher the credit rating, the lower the interst
while the lower the credit rating, the higher the
interest.
In the United States, in certain cases, insurance,
housing and even employment can also be denied based on
a negative credit rating. Laws to protect consumers are
in place however, to regulate this behavior.
Interestingly enough, it is not the credit reporting
agencies that decide whether a credit history is
"adverse." It is the individual lender or creditor which
makes that decision. Each lender has its own policy on
what scores fall within their guidlelines. The specific
scores that fall within a lender's guidelines is most
often NOT disclosed to the applicant due to its nature
as a trade secret. In the United States, a creditor is
required to give a reason for denying credit to an
applicant immediately and must also provide the name and
address of the credit reporting agency who provided data
that was used to make the decision. |
