What is Bad Credit?
Bad Credit Redefined.
When banks or financial institutions lend to a person or to a company or when credit card companies and other financial institutions grant credit to a company or an individual, they are said to have given a credit to the borrower.
In this sense the credit granted may be spoken of as a good credit or a bad credit. By a good credit I mean getting a loan from a company or getting a credit card from a credit card company with terms that are favourable to the borrower. A good credit deal may mean that the terms associated with the credit are favorable to the borrower or the credit card holder and a bad credit deal may be not having a credit with favourable terms and conditions. Therefore, anything less than a good credit in relation to the terms of the credit granted may be regarded as bad credit
When a credit transaction is viewed in the way described above, it is very easy to take the term bad credit as used in general terms to mean a bad credit deal from a lender or a credit card company.
However, whilst this might be the case in some lending situations and a bad credit deal may be described by someone as bad credit, the term bad credit as used in everyday language is far from being a good or bad credit to the borrower. In general use, bad credit has nothing to do with the terms of the credit being granted to the borrower nor is based on any action by the lender.
Rather, bad credit is about the credit history of the borrower. When a person has a bad credit history, they are said to have a bad credit. Therefore, bad credit is all to do with the borrower and nothing to do with the lender.
How do people get bad credit?
As stated above, bad credit means having a bad credit history. The question that needs to be addressed is, how can a person get a bad credit history?
A credit history is all the details about financial transactions of a person right now and in the past. The credit history recorded also contains information about the borrower; their name, their address, their date of birth, sometimes details about their place of work and similar personal information of the borrower.
A person may get a bad credit if they don’t keep up to the terms and conditions of a loan granted to them or a credit card issued to them. This may mean that they fail to make the regular monthly loan repayments or credit card payments or a complete default on the loan or credit card. When that happens the credit history of the borrower becomes a bad credit history in the eyes of lenders.
Who keeps the credit history and where do they get the information from?
Who keeps the credit history you may ask? A credit history is kept by a credit reference agency. Sometimes they are called a credit bureau or a credit reporting agency. These are companies set up to monitor the relationship of a borrow with a lender regarding how the borrower keeps to the credit agreement and making the agreed monthly payments on regular basis. There are three main credit reference agencies or credit reporting agencies: Equifax, Experian, and TransUnion.
These three major credit reference agencies are independent of each other and keep and interpret information they receive differently. However, they all do the same thing, that is, providing credit information about a person to a lender to help lenders assess the risk of granting a loan or giving credit to an individual.
When a person enters into a loan agreement with a lender like After Loans Canada or when a person is issued with a credit card, details of the credit transaction is sent by lenders to one or all credit reporting agencies that they work with.
These companies receive the information about the credit transactions and keep them in a database. Lenders send monthly updates about how payments are being made to the credit reporting agency who then updates their records with the current information. This way a detailed credit history is built per transaction month by month.
The credit history will show the total amount borrowed, the length of time over which the loan will be paid back, the amount payable on a loan or credit each month, how regularly payments are made, record of missed payments and defaults on the loan.
Credit reporting agencies also play an important role in preventing fraud. They prevent multiple loan or credit applications from different lenders at the same time by a single individual. A fraudulent person may defraud lenders by applying for multiple loans from different lenders and then default on all of them.
They also help to minimise the risk lenders bear. By referring to the credit history of a potential borrower, lenders can assess the payment ability of the borrower. If the person already has large loans or many different loans and credits showing on their credit history, it is likely that they will find it difficult to keep up with regular payments on all the loans and credits. It will therefore be unwise to grant them more credit or give them other loans.
Some borrowers in financial trouble also rob Peter to pay Paul. They borrow from one lender to pay another lender. A closer look at their credit history may reveal this and a lender may shy away from granting a loan or credit to the person.
The impact of bad credit on the borrower
Whenever an individual or a company applies for credit, the lender then refers to the credit history of the potential borrower to see how well they keep up with payments. This helps the lender to assess the risk involved in granting a loan or credit to that individual.
An individual with a poor credit history or as it is normally referred to, bad credit, is considered high risk. There is a general saying that a leopard does not change its spots. It is very likely that a person who does not keep up with loan repayments or who make late payments or who defaults on loans with other lenders will do the same to a new lender.
Consequently, in general, people with a bad credit history find it difficult to get a loan from main stream banks.
At After Loans Canada, we are willing to help everyone with Bad credit acquire money for all emergencies.