Do you know how your Credit Score is calculated?
An adverse credit history, also called sub-prime, non-status, or impaired can cause a negative rating.
A negative credit rating is often considered undesirable to lenders and other extenders of credit for the purposes of loaning money or capital. A consumer's credit history is compiled by credit rating agencies, more commonly referred to as consumer reporting agencies or credit bureaux.
The data reported to these agencies is primarily provided to them by creditors and includes detailed records of the relationship a person has with the lender. Detailed account information, including payment history, credit limits, high and low balances, and any aggressive actions taken to recover overdue debts, are all reported regularly (usually monthly). This information is reviewed by a lender to determine whether to approve a loan and on what terms.
As credit became more popular, it became more difficult for lenders to evaluate and approve credit card and loan applications in a timely and efficient manner. To address this issue, a credit score system was adopted. Credit scoring is the process of using a proprietary mathematical algorithm to create a numerical value that describes an applicants overall creditworthiness. A "score" is a statistical analysis of a credit history, in comparison to other debtors, and gauges the magnitude of financial risk. Since lending money to a person or company is a risk, credit scoring offers a standardised way for lenders to assess that risk rapidly and "without prejudice".
Credit bureaux also offer credit scoring as a supplemental service. Credit scores assess the likelihood that a borrower will repay a loan or other credit obligation. The higher the score, the better the credit history and the higher the probability that the loan will be repaid on time. When creditors report an excessive number of late payments, or trouble with collecting payments, the score suffers. Similarly, when adverse judgments and collection agency activity are reported, the score decreases even more. Repeated delinquencies or public record entries can lower the score and trigger what is called a negative credit rating or adverse credit history. When a lender requests a credit score, it can cause a small drop in the credit score. This is because, a number of inquiries over a relatively short period of time can indicate the consumer is in a financially difficult situation.
