When you go to apply for a loan, the lender first of all tries to assess your credit worthiness – how willing you have appeared in the past to never take on debt that you are unable to repay, how willing have you been to repay debts that you have taken on, and your credit habits – all through looking at your credit. The outcome of an application for a line of credit that you place before a lender depends on what about you the lender can learn from that credit score. The better your credit score, the better he feels about his chances of being paid back. That kind of looks like the lender must really hate applicants with a bad credit history, doesn’t it? Well, not quite. When an applicant with a bad credit history walks in, he gets charged a higher lending rate. A borrower was a less-than-stellar credit score is good news to a lender – he means better profits. Let’s look at a few reasons a lender isn’t all that happy when someone with a 720 credit score walks in his door.
Someone with a credit score in the 500 or 600 range asking for a loan tells the lender that he can expect to make a lot of money in late fees and penalties. People with a low credit score usually have a tough time making their payments on time each month. Each time they delay making a payment, the lender collects in excess interest and penalties. In all, a customer with a bad credit history is nothing but good news for a lender – there are always the high interest rates that he can charge you and there are all those fat juicy penalties he can look forward to from time to time.
As far as the lender is concerned, the credit score of a borrower is what he uses to assess the kind of risk presented. Young applicants typically have almost no credit history to speak of. They haven’t been on their own for long enough as independent people to actually have a credit history or score. In these cases, lenders really have no idea what to do. The VantageScore credit score model was developed for cases like these. VantageScore was developed by the three major credit bureaus and it tries to build a credit model of a person based on just two years of credit behavior. But a poor credit score actually could scare a lender into believing that a borrower might bail on him. Contrary to popular belief, people with poor credit scores aren’t always out there looking for more ways to get easy loans. Consider the fact that there are about 10 million out-of-use credit cards in America that belong to people with a bad credit history. These people do have lines of credit in these cards; but they aren’t using them. This is the lender’s worst nightmare: that everyone with a poor credit history could end up getting their act together. What will they do then?
You can become a Credit Union member to get the hang of your credit history. If you want to know more about the Added Local Benefits of Becoming a Credit Union Member, check out Riegelwood Credit Union.