Credit Evaluation

Before any application for a loan or a credit accommodation is approved, a process called "credit evaluation and approval" is first conducted. This is being done to establish what is referred to as "credit worthiness," or the applicant's willingness as well as capacity to pay. Establishing one's credit worthiness is the only way whereby an applicant could gain the confidence of lenders since it could serve as a guarantee that the loan or the goods that would be purchased through credit would be paid on time (Answers. com, n. d. ).

For the purpose of establishing an applicant's credit worthiness, lenders utilize the services of "Credit Reporting Agencies (CRAs)" which are in the business of maintaining relevant data concerning the credit history of borrowers in the country. These CRAs sell their "credit reports" to interested lenders for use in their lending decisions. Generally, a credit report covers information about the types or kinds of credit that an individual uses; how long his or her accounts have been in use; and whether he or she has been paying his or her bills promptly.

Specifically, it contains the individual's personal information like Begin Match to source 4 in source list: http://www. leedscityschools. org/CertifiedAppication. pdfname, present address, date of birth,End Match and Begin Match to source 4 in source list: http://www. leedscityschools. org/CertifiedAppication. pdfsocial security number. End Match Also included in the report are details of all credit purchases made which includes the name of supplier, the item/s purchased, the amount of credit granted, payments made, present balance, and the history of payment.

In addition, the credit report includes the dates and names of lenders who have requested for copies of an individual's credit report and any negative information on file concerning his or her credit transactions such as frequencies of delinquent payments. Negative information also covers public records like Begin Match to source 5 in source list: (12-17-07) http://www. myfico. com/Downloads/Files/myFICO_UYFS_Booklet. pdf"bankruptcies, foreclosures, tax liens, garnishments, legal suits and judgments"End Match (Fair Isaac Corporation, n. d. ).

CRAs make use of credit scores to evaluate the credit risk of borrowers. The most widely used is the FICO score which was generated by Fair Isaac Corporation. It is based mainly on information found in the credit reports kept by the CRAs. A higher FICO score indicates a lower risk for lenders. In other words, an individual who has a high FICO not only obtains the confidence of lenders but is also offered better terms and lower interest rates. As of September 1, 2005, a copy could be obtained free of charge by anybody from any of the three leading CRAs in the country, namely: "Equifax, Esperian and TransUnion.

" This has made it easier for Americans to verify their credit report (Fair Isaac Corporation, n. d. ). Verifying one's credit report is very important for a couple of reasons. First, errors in maintaining the files could occur. One example of an error is when a woman borrower had previously purchased goods under different names such as her maiden and married names. An employee in a Credit Reporting Agency could make a clerical error in noting down an individual's Begin Match to source 6 in source list: (11-25-05) http://www. mountaincommunitybank. com/personal/resources/id_theft.

htmlpersonal information like name, address,End Match and Begin Match to source 6 in source list: (11-25-05) http://www. mountaincommunitybank. com/personal/resources/id_theft. htmlsocial security number. End Match Another error could be in the inadvertent application of loan information or credit card details to a wrong account (this error could be committed in the CRA or could be contained in the report submitted by the lender). These situations could adversely affect or muddle the credit report of an individual and should immediately be brought to the attention of the concerned CRA (Fair Isaac Corporation, n. d. ).

Another reason why checking one's credit report regularly is important is "identity theft. " This refers to a situation where an individual's personal information is used by another person to open and purchase goods on account or to obtain loans. This is a case of personal information "hijacking. " Only a regular check of one's credit report could detect such occurrences. Once an individual discovers an incident of identity theft, he or she is advised to do the following: Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost.

com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdf1. "Contact the credit reporting agencies to place fraudEnd Match alerts Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost. com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdfonEnd Match [his or her] Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost. com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdfcredit reports and to reviewEnd Match [his or her] Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost.

com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdfcredit reports. 2. Close anyEnd Match account Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost. com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdfthat have been tampered with or opened fraudulently. 3. File a report withEnd Match [his or her] Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost. com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdflocal police or the police in the community where the identity theft took place.

End Match [and] 4. Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost. com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdfFile a complaint with the Federal Trade Commission"End Match (Fair Isaac Corporation, Begin Match to source 1 in source list: (10-3-06) http://www. brokeroutpost. com/loans/files/Reference/myFICO%20Understanding%20Credit%20Scores. pdfn. d. ). End Match Several factors are being considered when computing the FICO score.

These are the "types Begin Match to source 2 in source list: (1-5-07) http://www. taipeitimes.com/News/editorials/archives/2006/03/20/2003298320of credit in use, payment history, amount owed, length of credit history, and new credit. " TheEnd Match type of credit in use, i. e. credit cards, mortgages, or purchases in installments, is being given 10%. The history of payment, which includes the types of payments and the incidents of late payments, 35% and the amount of the goods purchased on account, 30%. The FIFO score computation allocates 15% to the length of time that an individual has been using his or her credit accounts and another 10% to the number of new accounts that has been opened (About.com, n. d. ).

To improve one's FICO score, the following steps are recommended: 1. First, he or she should obtain Begin Match to source 3 in source list: (10-30-06) http://www. prattvilleprogress. com/apps/pbcs. dll/article? AID=/20060524/BUSINESS/605240336/1003/ARCHIVESa copy of his or her credit reportEnd Match from Begin Match to source 3 in source list: (10-30-06) http://www. prattvilleprogress. com/apps/pbcs. dll/article? AID=/20060524/BUSINESS/605240336/1003/ARCHIVEStheEnd Match CRAs and then carefully review it. 2. Then he or she should settle his or her bills promptly.

It is advised that when he or she has a short history of purchasing on account, he or she should not open many new accounts. 4. If his or her credit history is questionable, he or she should open a couple of new accounts and then use them properly, paying the bills promptly. 5. He or she should not open accounts which he or she does not want to use as this would not be good for his or her credit history. 6. The balances of his or her accounts should be kept well below his or her credit limit. This will have a positive impact on his or her status (About. com, n. d. ).

References

About. com. (n. d. ). Nine Ways to Improve Your FICO Credit Score and Four Reasons Why You Want To. Retrieved January 22, 2008 from http://financialplan. about. com/od/creditreportsandscores/a/ImproveFICO. htm Answers. com. (n. d. ). Credit Evaluation and Approval. Retrieved January 22, 2008 from http://www. answers. com/topic/credit-evaluation-and-approval? cat=biz- fin Fair Isaac Corporation. (n. d. ). Understanding Your Fico Score. Retrieved January 22, 2008 from http://www. nasfaa. org/subhomes/Annualconference2006/Handouts2006/S065Pr ivateLoansAndCreditScores2. pdf