Credit history or credit report is, in many countries, a record of an individual's or company's past borrowing and repaying, including information about late payments and bankruptcy. The term " credit reputation " can either be used synonymous to credit history or to credit score .
In the U.S., when a customer fills out an application for credit from a bank, store or credit card company, their information is forwarded to a credit bureau. The credit bureau matches the name, address and other identifying information on the credit applicant with information retained by the bureau in its files.That's why it's very important for creditors, lenders and others to provide accurate data to credit bureaus.
This information is used by lenders such as credit card companies to determine an individual's credit worthiness; that is, determining an individual's willingness to repay a debt. The willingness to repay a debt is indicated by how timely past payments have been made to other lenders. Lenders like to see consumer debt obligations paid on a monthly basis.
There has been much discussion over the accuracy of the data in consumer reports. However, the only scientifically researched studies that include sample sizes large enough to be valid have concluded that by and large the data in credit reports is very accurate. The credit bureaus point to their own study of 52 million credit reports to highlight that the data in reports is very accurate. The Consumer Data Industry Association testified before Congress that less than two percent of those reports that resulted in a consumer dispute had data deleted because it was in error.
If a consumer disputes some information in a credit report, the credit bureau has 30 days to verify the data. Over 70 percent of these consumer disputes are resolved within 14 days and then the consumer is notified of the resolution. The Federal Trade Commission states that one large credit bureau notes 95 percent of those who dispute an item seem satified with the outcome.
The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on income. The higher the income, all other things being equal, the more credit the consumer can access. However, lenders make credit granting decisions based on both ability to repay a debt (income) and willingness (the credit report) as indicated in the past payment history.
These factors help lenders determine whether to extend credit, and on what terms. With the adoption of risk-based pricing on almost all lending in the financial services industry, this report 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.
How credit rating is determined
Credit ratings are determined differently in each country, but the factors are similar, and may include:
- Payment history - a record of delinquent payments, generally being more than 30 days, will lower the credit rating.
- Control of debt - Lenders want to see that borrowers are not living beyond their means. Experts estimate that non-mortgage credit payments each month should not exceed more than 15 percent of the borrower's after-tax income.
- Signs of responsibility and stability - Lenders perceive things such as longevity in the borrower's home and job (at least two years) as signs of stability.
- Re-Aging - Through re-aging, the date of last action on the account is changed. This can dramatically alter the credit score. In 2000, the Federal Financial Institutions Examination Council (FFEIC) clarified guidelines on re-aging accounts for delinquent borrowers. (PDF)
- Utilization—Lenders ascribe increased risk to accounts with balances near their limits.
- Credit inquiries – An inquiry is noted every time a company requests some information from a consumer's credit file. There are several kinds of inquiries that may or may not affect one's credit score. Inquiries that have no effect on the creditworthiness of a consumer (also known as "soft inquiries") are:
- Prescreening inquiries where a credit bureau may sell a person's contact information to an institution that issues credit cards, loans and insurance based on certain criteria that the lender has established.
- A creditor also checks its customers' credit files periodically.
- A credit counseling agency, with the client's permission, can obtain a client's credit report with no adverse action.
- A consumer can check his or her own credit report without impacting creditworthiness.
- Inquiries that do have an effect on the creditworthiness of a consumer (also known as "hard inquiries") are made by lenders when consumers are seeking credit or a loan, in connection with permissible purpose. Lenders, when granted a permissible purpose, as defined by the Fair Credit Reporting Act, can "pull" a consumer file for the purposes of extending credit to a consumer. Hard inquiries from lenders directly affect the borrower's credit score. Keeping credit inquiries to a minimum can help a person's credit rating. A lender may perceive many inquiries over a short period of time on a person's report as a signal that the person is in financial difficulty, and may consider that person a poor credit risk.
- Credit cards that are not used - Although it is believed that having too many credit cards can have an adverse effect on a credit score, closing these lines of credit will not necessarily improve your score. Many risk models consider the difference between the amount of credit a person has and the amount being used: closing one or more accounts will reduce your total available credit, lower the percentage of available credit, and possibly lower your credit score. Risk models also factor in account age: closing an account with several years of history that is in good standing will most likely negatively affect your score.
Acquiring and understanding credit reports and scores
There are many businesses that aim to make money by providing services to consumers to check their credit reports and confirm the information in them. These companies advertise heavily. However, U.S. Law requires that the three major credit reporting agencies (Experian, Equifax, and TransUnion) provide a copy of the credit reports for any consumer that requests it, once per year. The website to order this legally-required and free service is https://www.annualcreditreport.com. Note that even carrying out the steps to acquire these reports, users will see promotions for extra credit-checking services that cost money. Carefully following the process and declining for-pay services will allow users to get their free, legally-mandated reports. Also note that the free reports will not tell you an actual credit rating number, which is not their goal. Rather, they provide a list of accounts so users can confirm that no erroneous information is on the reports.
The Government of Canada offers a free publication called Understanding Your Credit Report and Credit Score . This publication provides sample credit report and credit score documents with explanations of the notations and codes that are used. It also contains general information on how to build or improve credit history, and how to check for signs that identity theft has occurred. The publication is available online at http://www.fcac.gc.ca, the site of the Financial Consumer Agency of Canada. Paper copies can also be ordered at no charge for residents of Canada.
Credit History of Immigrants
Credit history usually applies to only one country. Even within the same credit card network, information is not shared between different countries. For example, if a person has been living in Canada for many years and then moves to the United States, when they apply for credit cards or a mortgage in the U.S., they would usually not be approved because of a lack of credit history, even if they had an excellent credit rating in their home country and even if they had a very high salary in their home country.
An immigrant must establish a credit history from scratch in the new country. Therefore, it is usually very difficult for immigrants to obtain credit cards and mortgages until after they have worked in the new country with a stable income for several years.
Adverse Credit
Adverse credit history , also called sub-prime credit history , non-status credit history , impaired credit history , poor credit history , and bad credit history , is a negative credit rating.
A negative credit rating is often considered undesirable to lenders and other extenders of credit for the purposes of loaning money or capital.
In the U.S., a consumer's credit history is compiled by consumer reporting agencies or credit bureaus. The data reported to these agencies are 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.
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, cred
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