Credit reports are created by Credit Bureaus and made public to financial institutions and money lenders that subscribe to the bureaus. The purpose of these credit reports is to describe the repayment capacity and the credibility of an individual as a solvent borrower. The credit report is a three digit numerical value derived from simple calculations based on repayment of loans and advances availed by the individual from various quarters such as personal loans, home loans, and credit cards. This three digit number begins at 300 and ends at 850. A Score of 800 is considered very good and a score of 600 borders on unreliability.
How a Credit Score Is Created
Every month the credit score is updated. Institutions such as those mentioned above report every payment received (or not received at all or on time) to the credit bureaus. This payment or default of payment is recorded by the bureau. Then the bureau calculates the score and compares the defaults with the timely repayments of all credit picked up by the individual and comes out with an average score. The more the delayed payments or the penalties recorded the poorer the credit score gets. That is what a credit score is in a nut shell.
A person with a perfect score will be nearer 800 and when this individual applies for a loan or a credit card, mortgage or an automobile loan the lending institution will look up his credit score. On finding a perfect score the individual will get his loan at a very reasonable rate of interest because the score shows a low risk of the individual defaulting on payments. On the other hand if the individual has a poor credit score (below 600) then the loan application may be rejected or it may be approved for a much lesser amount applied for at a much higher rater of interest. It is for this reason people must track their credit score and keep it healthy to avoid rejection in cases of emergency, when you might need cash from a lender.
How Credit Scores Go Bad
There are two ways credit scores can go bad. The first and most common way is by the individual delaying repayments of mortgages and loans. This could include a delay or failure to repay any financial obligation such as a loan, credit card payment, even an apartment rental.
The second way is the credit report containing reporting errors. These errors occur when the lending company such as the bank, credit card company, auto loan company fail to report payments made towards the outstanding debt. When they do not report the payments to the credit bureaus the bureau takes it for granted that the payment was not made and this results in the credit score deteriorating. This is a very common occurrence and this is the reason why credit reports should be constantly monitored.
