A credit report, also known as credit history is a record of a person or company’s borrowing and payment habits – this includes information about bankruptcy, late payments on credit cards, and late payments on any type of bills. Credit history is also related to credit reputation or credit score. Anytime someone applies for a credit card, sometimes a new apartment, or a line of credit at a bank, their credit information is sought after from the credit bureau which retains all credit information on people. Updates and any other changes are also forwarded to the credit bureau to keep files and history up to date. Lenders like credit card companies find out a person’s credit worthiness (or a company’s), where they analyze an individual’s ability and willingness to pay debt back. Credit card companies can more easily determine how much credit they want to give and on what terms. Credit reports are even more important now that financial institutions and lending entities have adopted risk based pricing. Risk based pricing involves charging different interest rates on the same loan to different people depending on what their credit history is like. People with bad credit ratings will have a higher interest rate, and those with a good credit score will have lower interest rates.
How credit rating is decided
Credit scores are determined differently in different countries but in general there are some main principles. Firstly, the payment record is checked – overdue bills will negatively affect the credit score. Next lenders will want to see potential clients not living outside of their means – control of debt. Financial experts agree that credit payments should not go ever 15 percent of your income after tax (not including mortgage payments). Lenders also look for signs of stability and responsible clients. If clients have a house and a job this shows stability. Certain respected professions can also positively affect the credit report. Re aging of accounts occurs when a credit history is re written and a client is given a clean slate on a particular account. This definitely improves credit history for borrowers that have made credit mistakes in the past. Credit inquiries are also looked at – the may or may not affect the credit report.
For more detailed information about credit scoring, or to order a credit report from the government please visit the Federal Trade Commission's Credit Scoring section of the site.