APMacro P2: Credit Report

Credit Report
Your ability to qualify for a loan depends on a credit report. A credit report is a record of an individual’s personal credit history. It is probably a good indicator of the applicant’s character and whether he or she will repay borrowed money as agreed. When someone applies for a loan, the lender will order a credit report to see how well the applicant has managed credit in the past. A credit report will tell, in detail, how much the person has borrowed, from whom, and whether the bills have been paid on time. Credit reports are compiled by credit bureaus, which regularly collect information on millions of consumers. Credit bureaus get information from a variety of sources, including stores, credit card companies, banks, mortgage companies, and medical providers. When you fill out an application for credit, the information on that application is also sent to a credit bureau.

Lenders look for certain qualities in loan applicants. These qualities are called the 3 Cs of Credit: capacity, character, and collateral.

  • Capacity refers to the loan applicant’s ability to repay the debt in question. The basic question is “Have you been working regularly in an occupation that is likely to provide enough income to support your use of credit?”
  • Character refers to questions asked to determine whether you are honest and reliable, thus likely to pay debts.
  • Collateral refers to assets that could be sold to pay off your loan in the event that you could not do so. Collateral serves as a type of insurance for the creditor.

A good rating on a credit report means that, in the past, bills have been paid on time. A poor rating indicates overdue payments or bills that have gone unpaid. It is extremely important to build and maintain a good credit history. A good credit report can often make the difference between getting a loan or being turned down. In addition, potential employers and landlords will often check an applicant’s credit report before making a final decision about offering a job or a renting out an apartment.

Mistakes can and do sometimes occur on credit reports. For example, a credit report may contain information about a different person with the same name as the applicant, or paid accounts may be listed incorrectly as unpaid. The law provides individuals with a means of requesting and reviewing their credit reports and having mistakes corrected. Under the Fair and Accurate Credit Transactions Act you have the right to get a free copy of your credit report from each credit bureau annually. The Fair Credit Reporting Act allows you to receive a free copy of your credit report if you are turned down for credit or are the victim of identity theft. The three largest credit bureaus are: Equifax, Experian, and TransUnion.

Credit reporting agencies summarize much of the information in your credit report into one credit score. The formula for computing credit scores was developed by Fair Isaac Corporation; the scores are commonly referred to as FICO scores. The scores range from 300 to 850, with the median score being 723. People with lower scores are more likely to be denied credit or charged higher interest rates. People with scores of 770 or higher will receive the best rates for loans. Scores of 640 or more will qualify applicants for fairly good rates. People with scores of 600 or less will have difficulty getting a loan. These people probably need credit counseling.



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