Bad Credit And Its Components
Bad credit history, also calledsub-prime credit history
,non-status credit history,impaired credit history,poor credit history, andadverse credit history, is a negativecredit rating. The consequence of a
bad credit rating is typically a reduction in the likelihood that a lender will approve an application for credit under favorable terms, if at all.However, it is to be noted that it is not the credit reporting agencies that decide whether a credit history is "Bad." It is the individual lender or creditor who makes that decision. Each lender has his individual policy on what scores fall within his guidelines. The specific scores that fall within a lender's guidelines are most often NOT disclosed to the applicant due to
competitive reasons. Insurance, housing, and employment can be denied based on a negative credit rating.
A consumer's credit history is compiled by consumer reporting agencies or credit bureaus. The data reported to these agencies is primarily provided to them by creditors and includes detailed records of the relationship a person 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 is reviewed by a lender to determine whether to approve a loan and on what terms.
The information in a
credit reporthistory is sold by credit agencies to organizations that are considering whether to offer credit to individuals or companies. It is also available to other entities with a "permissible purpose", as defined by the Fair Credit Reporting Act.
Interest rateson loans are significantly affected by credit history reports; the higher the credit rating, the lower the interest while the lower the credit rating, the higher the interest. The increased interest is used to offset the higher rate of default within the low credit rating group of individuals. In the United States, a creditor is required to give the reasons for denying credit to an applicant immediately and must also provide the name and address of the credit reporting agency that provided data that was used to make the decision.
As credit became more popular, it became more difficult for lenders to evaluate and approve credit card and loan applications in a timely and efficient manner. To address this issue,
credit scoringwas adopted. A benefit of scoring was that it made credit available to more consumers and at less cost. Credit scoring is the process of using a proprietary mathematical
algorithmto create a numerical value that describes an applicant's overall creditworthiness. Scores, frequently based on numbers (ranging from 300850 for consumers in the United States), statistically analyze a credit history, in comparison to other debtors, and gauge the magnitude 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.All credit bureaus also offer
credit scoringas a supplemental service.
Credit scores 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
probabilitythat the loan will be repaid on time. When creditors report an excessive number of late payments, or trouble with collecting payments, the score suffers. Similarly, when adverse judgments and collection agency activity are reported, the score decreases even more. Repeated delinquencies or public record entries can lower the score and trigger what is called a negative credit rating or adverse credit history or a
bad credit score.Your credit score is a number calculated from factors such as the amount of credit outstanding versus how much you owe, your past ability to pay all your bills on time, how long you've had credit, types of credit used and number of inquiries. Fair Isaac is one of the major developers of credit scores used by these consumer reporting agencies.
These factors help lenders determine whether to extend credit, and on what terms. With the adoption of
risk-based pricingon almost all lending in the
financial servicesindustry, this report / score has become even more important since it is usually the sole element used to choose the
annual percentage rate(APR), grace period and other contractual obligations of the credit card or loan.
by: Ask Bill
How To Improve Your Bad Credit Score Improving Bad Credit Finding Bad Credit Loan Help How To Prepare For Bad Credit Loans Eliminating Your Credit Card Debt Information On Credit Card Debt Program Settlement Conducting Your Very Own Credit Card Debt Relief Program Credit Card Debt Relief Options Clearing Up Credit Card Debt Get Rich With Credit Consolidating Your Credit Card Debts Discuss Tax Credits With An Encino Cpa Financial Aid For Students, Bad Credit Also Take Advantage