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Adverse Credit History, also called sub-prime
credit history, non-status credit history,
impaired credit history, poor credit history and
bad credit history, is a negative
credit 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 or business' credit history is regularly
tracked by
credit rating agencies.
The data reported by these agencies is primarily
provided to them by creditors and includes
detailed records of the relationship a person or
business 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 can be quite detailed and arduous to
navigate by a potential lender dealing with a new
applicant. To address this issue,
credit scoring
was invented.
All
credit bureaus also offer a supplemental service
called
credit scoring.
Credit scoring is the process of using a
proprietary mathematical
algorithm
to create a numerical value that alleges to be a
total picture of an applicants creditworthiness.
Scores, based on numbers from 250-800 are alleged
to statistically analyze a credit history, in
comparison to other debtors, and gauge the
likelihood of the magnitude of financial risk.
Since lending money to a person or company is a
risk, credit scoring offers a standardized way for
lenders to assess that risk rapidly and "without
prejudice."
Credit scores allege to 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; this theory
purports. When creditors report an excessive
number of late payments, or trouble with
collecting payments, a "hit" on the score is
suffered. Similarly, when adverse judgments and
collection agency activity are reported, even
bigger "hits" on this score are suffered. Repeated
hits can lower the score and trigger what is
called a negative credit rating or adverse credit
history.
The
information in a
credit report
is sold by the credit agencies to organizations
that are considering whether to offer credit to
individuals or companies, it is also available to
other entities with a "permissible
purpose." The
consequences of a negative credit rating is
typically a reduction in the likelihood that a
lender will approve an application for credit
under favorable terms or at all.
Interest rates
on loans are often based on credit history in an
almost backwards-intuitive way--the higher the
credit rating, the lower the interest while the
lower the credit rating, the higher the interest.
In
the United States, in certain cases, insurance,
housing and even employment can also be denied
based on a negative credit rating. Laws to protect
consumers are in place however, to regulate this
behavior.
Interestingly enough, it is not the credit
reporting agencies that decide whether a credit
history is "adverse." It is the individual lender
or creditor which makes that decision. Each lender
has its own policy on what scores fall within
their guidelines. The specific scores that fall
within a lender's guidelines is most often NOT
disclosed to the applicant due to its nature as a
trade secret.
In the United States, a creditor is required to
give a reason for denying credit to an applicant
immediately and must also provide the name and
address of the credit reporting agency who
provided data that was used to make the decision.
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