THERE are very few who understand the importance of a healthy credit history. Some of us are even not clear as to what we mean by the word “Credit History” and the factors which affect our Credit history.
Let me state in simple terms that if someone’s credit history is not good it would be difficult for that person to solicit loans from banks and thus the importance of maintaining a healthy credit history.
When in school or college, we mainly worry a lot about our intending scores or marks in the annual examinations. When in search of a job, we start worrying about interview scores, and when employed the worry is how to score A+ grading during the annual performance appraisal.
Although, there is a different kind of worry when a person becomes old; he/ she had to strive hard to achieve positive scores into one’s health report, else the problem. So in our life there are many reports wherein our individual score matters a lot. One such important report relates to our ‘Credit History’ or ‘Credit Score’.
I am sure some of you may be surprised as to why I am attaching so much importance to the word – ‘Credit History’. I admit that the word ‘Credit History’ is not very popular unlike other financial jargons but that does not make it less important than others.
So going forward, let us first understand what we mean by this phrase. “Credit history or credit report”, is a record of an individual’s or a company’s past borrowings and repayments, including information about late payments and bankruptcy.
The term “credit reputation” can either be used synonymous to credit history or to credit score. In many countries, when a customer fills out an application for credit from a bank or credit card company, their information is forwarded to a “credit bureau”.
The credit bureau matches name, address and other identifying information of the applicant with corresponding 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.
From this source [i.e. Credit Bureaus] this information is used by lenders such as banks, credit card companies etc. to determine any individual’s credit worthiness; that is, determining an individual’s willingness to repay a loan.
The willingness to repay a debt is indicated by how timely past payments have been made by you to other lenders. The other factor in determining whether a lender will provide a consumer credit or a loan is dependent on one’s income.
Higher the income, all other things being equal, more amount of credit the consumer can access. Thus, 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 in determining whether to extend credit, and on what terms. With adoption of riskbased pricing on almost all lending’s 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.
The above demonstrates the importance of maintaining a healthy credit history or score. You never know when a bad credit history can emerge years later to haunt you and can spoil your rosy plans in hand.
Adverse credit history also known as sub-prime credit history, non-status credit history, impaired credit history, poor credit history, or bad credit history, connotes 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. Credit scores assess the likelihood that a borrower will repay a loan or other credit obligation.
Higher the score, better the credit history and higher the probability that 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 activities 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.
Please understand that your credit score and your underlying history are one of the most vital parts of your financial life. Your credit score follows you forever