Role of Credit History in Determining Default Risk

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Lenders canvass themselves from incurring heavy losses through customer default by assessing each loan applicant’s credit history to determine their credit worthiness. Such information is kept by credit bureaus and they inform companies on the repayment records of an individual or company based on a credit score.

Lending entities such as banks and credit card companies also take into account an individual’s income and current debt obligations. Depending on the income levels of the applicant, the lender will extend credit amounts relevant to the same under applicable terms.

Credit cards are typically not used to determine the credit score of an individual applying for credit, but owing a lot of money on these cards will be taken into consideration under current debt obligations against your income. The higher the percentage of available credit on your cards the higher the credit score.

The assessment of a credit report may zoom in on the number of lenders inquiries to the credit rating firms, although low or average frequency of inquiries does not play a negative role on the loan application determinations. The implication of high number of lender inquiries is that it can be viewed as a sign of financial woes.

Credit history which shows a tendency to over-borrow, that is beyond a certain acceptable debt to income ratio, particularly on non-major items paints an adverse picture. While job hopping and a lack of stability which extends to your home or residence may be construed as negative tell-tale sign.

But the biggest issue around the credit records remains visible delinquent footprints which prove your unwillingness or inability to honor your dues, although some lenders are known to cross that line by extending credit lines to previous defaulters, this is normally done when collateral or security is involved.

Credit reporting agencies access the information they hold from creditors, and it pertains to overall account balances, credit limits, foreclosures or repossessions, litigation and payment history. Credit rating or scoring is determined by employing a mathematical algorithm that reflects a numerical bearing as regards a credit applicant’s default risk. .

The ultimate decision to extend credit or not lies with the lenders involved, credit rating agencies only serve to inform on the basic credit information of an applicant.And when credit is denied the directive in some countries is that a lender must divulge the grounds on which the credit was withheld. Credit bureaus or reporting agencies derive some of their operating revenues from selling this type of information to inquiring companies


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