Credit Reports & Ratings Articles


Why Credit Ratings Matter

It is quite often that people take their credit record for granted. They may miss out on some payments without care or they may have an inch-thick of credit cards in store. It is only when they have been denied a credit approval that they get to realize the significance of their credit history as contained in their credit report.



A credit report is a document that contains information on how prompt a person is when it comes to paying bills and repaying loans. It also informs on how much available credit the person has and what his monthly obligations are. The same report includes inquiries from potential creditors as well as information from public records like tax liens, court judgments and bankruptcies.

When a person applies for a credit card, a loan to buy a house or a car, or a credit line for whatever purchase he may have in mind, his credit record is accessed by the prospective lender to assess the credit worthiness of the would-be borrower. For this purpose, a credit report is generated by the credit bureau and submitted to the lender.

Credit bureaus are also known as credit reporting agencies (CRAs). They collect relevant information from merchants, banks and other lenders, landlords, court records, etc. They organize the data into a single report which they sell to interested parties such as a lender evaluating a loan application, an insurance firm or employer who's looking into the character of a job-applicant.

At present, there are three national credit bureaus: Equifax, Experian and TransUnion. Each has its own data base and generates its own separate credit report.

While the credit report itself does not qualify its subject to be a good or bad credit risk, it provides enough data for lenders to make their own assessment. A report that indicates habitual late payments, accounts that remain unpaid for a long time, or outstanding loans with substantial balances, are viewed unfavorably by prospective lenders. If the loan applicant has been delinquent with his existing obligations, he will most likely be negligent with any new loan as well. On the other hand, if the person already has huge borrowings, increasing his debts further may impair his capability to settle all his liabilities.

Lenders are also interested in the 'hard inquiries' mentioned in the credit report. Hard inquiries are requests made by other creditors to look into a person's credit history. These include credit card companies, banks or financing institutions.

Too many inquiries may suggest that subject is having some financial difficulty and needs a lot of credit or that he intends to incur a large debt. In either case, lenders may consider subject person to be a high credit risk.

Based on the information contained in the credit report, the prospective lender determines the loan applicant's credit score or credit rating. It is a 3-digit number that ranges from 300 to 850 with the higher figures indicating the more favorable credit.

Lenders use credit ratings to approve or deny loan applications. They also use the score in setting the interest rates. Higher scores equal better credit and are given lower interest rates. Those with lower scores may still be granted loans but their interest rates are priced higher.