Credit History
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Credit history, sometimes called credit report refers to a record displaying an individual’s or an enterprise’s history of borrowing, repaying including information relating to late payments as well as bankruptcy.
In the United States of America, subsequent to a customer filling out an application for getting credit from a credit card company, all the information is sent to a credit bureau. The bureau matches the personal details of the credit application with the information stored in their files. The information provided by the credit bureau is utilized by creditors or lenders for determining a person’s creditworthiness.
Adverse or poor credit history
A poor or negative credit history of a customer is undesirable to creditors for loaning capital or money. Past creditors associated with the particular borrower provide detailed information to the credit bureau or agencies. These contain account information like payment history, high or low balances, credit limits and aggressive actions, if any, taken for recovery of overdue debts. Based on these details the lender decides whether to extend the loan or not, and also the necessary terms and conditions.
As credit gained popularity, it became difficult for creditors to evaluate as well as approve credit card or loan applications in an efficient and timely manner. To provide a solution to this, the system of credit scoring came to be adopted. Credit scoring uses a proprietary mathematical instruction for creating a numerical value describing the overall creditworthiness of an applicant. Scores for consumers in the U.S usually range from 300 – 850.
General process of determining credit rating and credit history
• Payment history, which includes past delinquent payments (overdue for more than 30 days).
• Debt control is an important factor for determining credit rating. Lenders do like to see their borrowers leading their lives within their means, and not directing more than 15% of their income for payments towards non – mortgage credit each month.
• Lenders take such things as length of time spent in the home of the borrower as well as being in a job for more than two years as signs of stability and responsibility of a prospective borrower.
• Re-aging is the process whereby credit score can be dramatically altered. The Federal Financial Institutions Examination Council (FFEIC) has provided clarification on guidelines for re – aging accounts relating to delinquent borrowers.
• Lenders find those accounts risky where balances are close to their limits.
• Closing a credit card account with a long history of good standing will have a negative effect on your credit score. There is a difference between the total credit amount an individual possesses, and the actual amount he uses. Thus having several credit cards may not necessarily have any adverse effect on the credit score. On the contrary, closing of credit card accounts can reduce availability of total credit and also cause lowering of the credit score.
• Certain types of past history of inquiries can also affect an individual’s credit history. Minimum credit inquiries during a specified time increase an individual’s credit rating.
Thus the importance of having a good credit history cannot be undermined.