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 Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay its creditors. Creditors may file a bankruptcy petition against a debtor in an effort to recoup a portion of what they are owed or initiate a restructuring. In the majority of cases, however, bankruptcy is initiated by the debtor (a ". The term "credit reputation" can either be used synonymous to credit history or to credit score A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.

In the U.S., when a customer fills out an application for credit from a bank A bank is a financial institution licensed by a government. Its primary activities include borrowing and lending money. Many other financial activities were allowed over time. For example banks are important players in financial markets and offer financial services such as investment funds. In some countries such as Germany, banks have, store or credit card A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer from which the user can borrow money for company, their information is forwarded to a credit bureau A credit bureau , or credit reference agency (UK) is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals borrowing and bill paying habits. This helps lenders assess credit worthiness, the ability. 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. (^[1])

This information is used by lenders such as credit card A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer from which the user can borrow money for companies to determine an individual's credit worthiness Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest or both); 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. (^[2]) (^[3]) 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.(^[4])

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. (^[5]) The Federal Trade Commission states that one large credit bureau notes 95 percent of those who dispute an item seem satified with the outcome.(^[6])

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 Risk-based pricing is a methodology adopted by many lenders in the mortgage and financial services industries. It has been in use for many years as lenders try to measure loan risk in terms of interest rates and other fees. The interest rate on a loan is determined not only by the time value of money, but also by the lender's estimate of the on almost all lending in the financial services Financial services refer to services provided by the finance industry. The finance industry encompasses a broad range of organizations that deal with the management of money. Among these organizations are banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored industry, this report has become even more important since it is usually the sole element used to choose the annual percentage rate The terms annual percentage of rate , nominal APR, and effective APR (EAR) describe the interest rate for a whole year (annualized), rather than just a monthly fee/rate, as applied on a loan, mortgage, credit card, etc. It is a finance charge expressed as an annual rate. Those terms have formal, legal definitions in some countries or legal (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.^{[citation needed]}
• 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.^{[citation needed]}
• 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 The Federal Financial Institutions Examination Council, or FFIEC, is a formal interagency body of the United States government empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System , the Federal Deposit Insurance (FFEIC) clarified guidelines on re-aging accounts for delinquent borrowers. [1] (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 A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus. 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 Institutions are structures and mechanisms of social order and cooperation governing the behavior of a set of individuals. Institutions are identified with a social purpose and permanence, transcending individual human lives and intentions, and with the making and enforcing of rules governing cooperative human behavior. The term "institution& that issues credit cards, loans and insurance based on certain criteria that the lender has established.
  • A creditor A creditor is a party that has a claim to the services of a second party. It is a person or institution to whom money is owed. The first party, in general, has provided some property or service to the second party under the assumption (usually enforced by contract) that the second party will return an equivalent property or service. The second also checks its customers' credit files periodically.
  • A credit counseling Credit counseling is a process offering education to consumers about how to avoid incurring debts that cannot be repaid. This process is actually more debt counseling than a function of credit education agency, with the client's permission, can obtain a client's credit report 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 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 A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower 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.

Understanding credit reports and scores

The Government of Canada Canada is a country occupying most of upper North America, extending from the Atlantic Ocean in the east to the Pacific Ocean in the west and northward into the Arctic Ocean. It is the world's second largest country by total area and shares the world's longest common border with the United States to the south and northwest 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 The Financial Consumer Agency of Canada is an independent government agency of the Government 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 credit rating estimates the credit worthiness of an individual, corporation, or even a country. It is an evaluation made by credit bureaus of a borrower’s overall credit history. Credit ratings are calculated from financial history and current assets and liabilities. Typically, a credit rating tells a lender or investor the probability of the.

A negative credit rating is often considered undesirable to lenders and other extenders of credit for the purposes of loaning money or capital^[7].

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, credit scoring A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus was adopted.^{[citation needed]}A benefit of scoring was that it made credit available to more consumers and at less cost. (^[8])

Credit scoring is the process of using a proprietary mathematical algorithm In mathematics, computing, linguistics, and related subjects, an algorithm is a finite sequence of instructions, an explicit, step-by-step procedure for solving a problem, often used for calculation and data processing. It is formally a type of effective method in which a list of well-defined instructions for completing a task, will when given an to create a numerical value that describes an applicants overall creditworthiness. Scores, frequently based on numbers (ranging from 300-850 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."^{[citation needed]} All credit bureaus also offer credit scoring A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus as 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 probability Probability, or chance, is a way of expressing knowledge or belief that an event will occur or has occurred. In mathematics the concept has been given an exact meaning in probability theory, that is used extensively in such areas of study as mathematics, statistics, finance, gambling, science, and philosophy to draw conclusions about the 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 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.

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.The three major consumer reporting agencies, Equifax, Experian and TransUnion all sell credit scores to lenders. Fair Isaaac is one of the major developers of credit scores used by these consumer reporting agencies. The complete way in which your FICO^[9] score is calcualted is complex. One of the factors in your Fico score is credit checks on your credit history. When a lender requests a credit score, it can cause a small drop in the credit score.^[10][11] That is because, as stated above, a number of inquiries over a relatively short period of time can indicate the consumer is in a financially difficult situation.

Consequences

The information in a credit report 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 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. The consequence of a negative credit rating is typically a reduction in the likelihood that a lender will approve an application for credit under favorable terms, if at all. Interest rates An interest rate is the price a borrower pays for the use of money they do not own, for instance a small company might borrow from a bank to kick start their business, and the return a lender receives for deferring the use of funds, by lending it to the borrower. Interest rates are normally expressed as a percentage rate over the period of one on loans are significantly affected by credit history—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 insurance, housing, and employment can be denied based on a negative credit rating.

Note that is not the credit reporting agencies that decide whether a credit history is "adverse." It is the individual lender or creditor which makes that decision, each lender has its own policy on what scores fall within their guidelines. The specific scores that fall within a lender's guidelines are most often NOT disclosed to the applicant due to competitive reasons A trade secret is a formula, practice, process, design, instrument, pattern, or compilation of information which is not generally known or reasonably ascertainable, by which a business can obtain an economic advantage over competitors or customers. In some jurisdictions, such secrets are referred to as "confidential information" or ". 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 who provided data that was used to make the decision.

More than One Credit History Per Person

In some countries, people can have more than one credit history. For example, in Canada, although most Canadians are not aware of it, every person who applied for credit before obtaining a Social Insurance Number A Social Insurance Number is a number issued in Canada to administer various government programs. The SIN was created in 1964 to serve as a client account number in the administration of the Canada Pension Plan and Canada's varied employment insurance programs. In 1967, Revenue Canada (now the Canada Revenue Agency) started using the SIN for tax has two separate credit histories, one with SIN and one without SIN. This is due to the credit reporting structure in Canada. This can lead to two completely separate parallel histories, and often leads to inconsistencies (although typically the person in question will never notice the inconsistencies), because when a lender asks for someone's credit report with SIN, what the lender gets is different from what he would have gotten if he asked the report without providing the SIN. This is because, contrary to popular belief, when someone gets a new SIN for whatever reason, the two credit files are never merged unless the person requests specifically. As a result, a record with SIN zeroed out is kept separately from a record with SIN. Note this happens without the person even knowing it.^{[citation needed]}

See also

• Alternative data In economic policy, alternative data refers to the inclusion of non-financial payment reporting data in credit files, such as telecom and energy utility payments. Only 39 of 178 economies have credit bureaus that currently track alternative data
• Credit bureau A credit bureau , or credit reference agency (UK) is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals borrowing and bill paying habits. This helps lenders assess credit worthiness, the ability
• Credit card A credit card is part of a system of payments named after the small plastic card issued to users of the system. It is a card entitling its holder to buy goods and services based on the holder's promise to pay for these goods and services. The issuer of the card grants a line of credit to the consumer from which the user can borrow money for
• Credit rating agency A credit rating agency is a company that assigns credit ratings for issuers of certain types of debt obligations as well as the debt instruments themselves. In some cases, the servicers of the underlying debt are also given ratings. In most cases, the issuers of securities are companies, special purpose entities, state and local governments, non-
• Credit reference agency A credit bureau , or credit reference agency (UK) is a company that collects information from various sources and provides consumer credit information on individual consumers for a variety of uses. It is an organization providing information on individuals borrowing and bill paying habits. This helps lenders assess credit worthiness, the ability
• Credit score A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus
• Identity theft Identity theft is a term used to refer to fraud that involves someone pretending to be someone else in order to steal money or get other benefits. The term is relatively new and is actually a misnomer, since it is not inherently possible to steal an identity, only to use it. The person whose identity is used can suffer various consequences when he
• Seasoned trade lines A seasoned trade line is a line of credit that the borrower has held open in good standing for a long period of time, typically at least 2 years. A controversial practice involving seasoned trade lines, sometimes called piggybacking, uses a creditworthy borrower's accounts to improve the credit rating of an unrelated third party
• Fair Credit Reporting Act The Fair Credit Reporting Act is an American federal law (codified at 15 U.S.C. § 1681 et seq.) that regulates the collection, dissemination, and use of consumer credit information. (Full Statute (PDF).) Along with the Fair Debt Collection Practices Act (FDCPA), it forms the base of consumer credit rights in the United States. It was originally
• Fair and Accurate Credit Transactions Act The Fair and Accurate Credit Transactions Act of 2003 is a United States federal law, passed by the United States Congress on November 22, 2003, and signed by President George W. Bush on December 4, 2003, as an amendment to the Fair Credit Reporting Act. The act allows consumers to request and obtain a free credit report once every twelve months
• Fair Debt Collection Practices Act The Fair Debt Collection Practices Act , 15 U.S.C. § 1692 et seq., is a United States statute added in 1978 as Title VIII of the Consumer Credit Protection Act. Its purposes are to eliminate abusive practices in the collection of consumer debts, to promote fair debt collection and to provide consumers with an avenue for disputing and obtaining
• Office of Fair Trading The Office of Fair Trading is a non-ministerial government department of the United Kingdom, established by the Fair Trading Act 1973, which enforces both consumer protection and competition law, acting as the UK's economic regulator. The OFT's goal is to make markets work well for consumers, ensuring vigorous competition between fair-dealing
• Remortgage A remortgage is the process of paying off one mortgage with the proceeds from a new mortgage using the same property as security. The term is mainly used commercially in the United Kingdom, though what it describes is not uniquely British. Often the purpose of switching is to secure a more favorable interest rate from a different lender

References

1. ^ http://www.washingtontimes.com/news/2009/jan/19/credit-agencies-are-the-messengers/
2. ^ http://www.federalreserve.gov/pubs/bulletin/2004/summer04_credit.pdf
3. ^ http://www.michigan.gov/documents/cis_ofis_allstate_testimony_36911_7.pdf
4. ^ http://www.house.gov/apps/list/hearing/financialsvcs_dem/ospratt061907.pdf
5. ^ http://www.house.gov/apps/list/hearing/financialsvcs_dem/ospratt061907.pdf
6. ^ http://www.ftc.gov/os/comments/fcradispute/P044808fcradisputeprocessreporttocongress.pdf
7. ^ Turner, Michael A et al., Give Credit Where Credit Is Due, Political and Economic Research Council The Political and Economic Research Council is a Chapel Hill, North Carolina based non-profit, non-partisan think tank concentrates on market-based economic development, both in the United States and internationally. PERC is a primary thought leader in the field of alternative data, and has spearheaded information-led development as a means for, 1.
8. ^ http://www.federalreserve.gov/boarddocs/RptCongress/creditscore/creditscore.pdf
9. ^ "All about FICO". Brad Stroh. http://www.articlecat.com/Article/All-About-Your-FICO-Score/7767.
10. ^ "Facts & Fallacies". Fair Isaac Corporation. http://www.myfico.com/CreditEducation/FactsFallacies.aspx. Retrieved on 2007-08-08.
11. ^ "What’s In Your Score". Fair Isaac Corporation. http://www.myfico.com/CreditEducation/WhatsInYourScore.aspx. Retrieved on 2007-08-08.

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