Importance of Credit Report and Score in Determination of Risk Factors in Loan Approval
Importance of credit report and score can be easily understood from the fact that it is the most important part of anyone’s credit history. While credit report is the history of the person’s credit records, credit score is a number that is used to assess the risk factor by the lenders. Credit score is also known as FICO score.
Use of Software
Normally some software is used by the lenders to calculate the credit score of the prospective borrower. Once the data is fed into the software, it will give out a number indicating the person’s credit score. None of the three major credit reporting agencies use the same software and very often the scores generated by them for the same person could be different.
Credit Report Importance
Importance of credit report and credits score is that it not only indicates the payment history, liabilities, and types of credits used and their up to date position but also is the measuring rod for determination of eligibility for financial assistance. Since the report contains number of credits repaid in due date and all negative results, it will help the lender to perfectly assess the risks involved in financing such clients.
What the Report Indicates
Major importance of credit report and credit score is that it indicates the true financial status of the prospective borrower. Lender gets the knowledge of delinquent accounts that such borrower has and the length of time for which he or she has remained defaulter on some repayments. At the same time it gives the prospective borrower valuable information about his or her liabilities with accounts and balances, installments due, and above all; the number nil balance accounts.
Relevance of Credit Report
For any new credit the importance of credit report and credit score is even more. It indicates the number of accounts that have been recently opened and proportion of these new accounts to total number of accounts that the prospective borrower has in his or her possession. Report will also include the number of recent credit inquiries and it will determine whether the client has established a positive credit history or not. A person trying to open numerous accounts would be a prime risk for any lender as such ploy is usually adopted to avoid disclosure of payment problems encountered by the borrower.
Good and Bad Credit Score
Another major importance of credit report and credit score is that it helps the lender distinguish between good and bad credit score. Normally the range of credit scores is 340-850. People with higher scores will be considered as lower risks by the lenders. Lowering the risk will also mean lower interest rates and less stringent terms and conditions in the loan sanctioned.
Importance of credit report and credit score is reflected in the fact that borrowers scoring over 800 credit score would never find any problem in getting financial assistance from lenders. On the other hand people having scores below 700 will face more difficulty in getting such loans and the difficulties will grow as the scores drops down.
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