Credit Checking, Decreases Risk and Increases Profit
Companies use your previous loan records and payment history from their own banks or other financial institutions to assess your behavior and predict your financial risk. This information is neither conclusive nor comprehensive. The 3 credit scores can vary, making it hard to decipher your creditworthiness. So they develop separate scoring models using credit scores along with other parameters to predict a customer’s payment potential. Credit Risk Levels are ranges of Credit Scores, which help in deciding the risk they take by approving a loan or line of credit. The whole process is about lenders picking their perfect customers, and their reasons for rejection can seem unusual and even amusing, but it’s quite rational for them. Banks are likely to reject customers (even credit worthy ones) if they pose a threat to their profits.
Don't overlook your credit score. Your credit score will help you to make informed financial decisions and to re-establish your credit worthiness. The first step is to pay all your bills on time every time, at least the minimum payments for credit cards. Ask for an extension if you are really in a critical situation, and unable to make a payment. Importantly, don’t close existing credit accounts or apply for new cards, as it could affect your credit score.
Credit Reports Helps in Your Financial Diagnosis
Banks, utility companies and other organisations are tracking the details of all your payments and transactions on credit cards, loans, mortgages, bank accounts, utility bills and mobile phone contracts.
This information along with the data held by the three credit reference agencies is used to evaluate your loan eligibility. Credit Bureaus collate large databases of credit information, which is provided to financial institutions to assess the credit risk level of a potential customer. The 3 credit agencies commonly used are Equifax, Experian and TransUnion. The credit bureaus only evaluate your credit score and generate credit reports. They do not advise lenders about your credit worthiness. Based on your credit report, the lenders decide whether to approve or reject your loan application. The credit report simply lays out the facts of your payment history.