Money lending involves risk and the greatest risk is the inability of the borrower to pay back the loan. A qualitative credit reporting firm can substantially reduce such risks.
Risk Factor in Lending
For instance; you have loaned our $100 to a friend who promised to pay it back within a month.
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However, even after passage years, the money does not come back;
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You only find out later that it is habitual for your friend taking loans and not returning it; and
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Had you known this earlier you would not have dared to grant any credit in his favor.
Credit Reporting Agencies
Most large lending institutions such as the banks, mortgage companies and other creditors get involved in risks when they grant loans to borrowers.
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Such loans are awarded by lenders to borrowers for buying homes or financing cars or any such purposes;
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They attempt to minimize the risk by examining carefully the credit history of the borrowers; and
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Credit reports and credit scores of the prospective borrowers determine their credit eligibility and the interest rates to be charged on such loans.
Credit History from Reporting Agencies
Gist of it is that bad credit history results in stringent loan repayment conditions and higher interest rates. Prospective lenders get these on payment of charges from the credit reporting agencies. On the other hand the prospective borrower must try to keep the credit report clean and credit scores higher to be eligible for best financial deals.
How to Prevent Such Situation?
However, the prospective borrower can work to prevent such situation. Some of the steps that would help are –
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They can print free credit report from the major credit reporting agencies; Trans Union, Equifax, and Experian;
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Under the Fair Credit Reporting Act every citizen is entitled to have one free credit report from each of these credit reporting agencies annually; and
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Prospective borrowers can also order credit report online or go for their three in one report in which they will find their credit report prepared by all the three major credit reporting agencies.
How Agencies Perform the Task?
Credit reporting agencies collect information from different financial institutions on the credit related behavior of the person concerned and build up their credit reports. Information that is provided in the credit report is also used to calculate a three digit credit score.
How Lenders Go for It?
Most of the times before granting a loan to the prospective borrower the lenders approach one of these credit reporting bureaus to get the credit report of the prospective borrower and learn their credit scores. At times they also call for the joint credit report for the purpose.
Firms that report credit history and credit scores, thus perform some task for both the prospective lenders and prospective borrowers.
