Remember how you used to be ready to lend your last dollar to your trusted friend back in college, even though you couldn`t see where he was going to get the money to repay you? Likewise, how do you react when approached by an office colleague for a small loan, who earns a decent salary, but who had to be reminded twice by you before he paid back the thousand dollars he had had borrowed from you during a particularly sticky month before? Right, you make up some story to avoid lending money to him again.
For ages, financing and banking have been done on the basis of a very precious commodity - trust. A person who has a good record in the past can find a number of people willing to lend money to him in difficult times, but a person who has not been the most prompt in repaying a loan might find people turning away from him when he needs some money again. This is what is known as a credit history, and the instances given above might be simple examples, but a bank or financial institution does the same in a much more detailed and systematic way to find out the creditworthiness of a prospective borrower.
You can damage your credit history by doing any or all of the following things:
- Late repayments on credit card balances or loan EMI schedules
- Insufficient funds in your balance causing checks issued by you to be returned
- Bank induced closure of your loan due to forged or insufficient documentation
- One time settlement of dues with a credit card issuer or a lender of money
Every individual and company are assessed by credit rating agencies which give a credit score based on the past history of credit by that individual or company. If this rating shows a bad credit history, then subsequent applications of loans or credit cards are likely to be rejected. Even if they are sanctioned, there will be certain additional conditions attached.
In case you need a personal loan, even if the load is sanctioned, you are likely to be charged a slightly higher rate of interest than others with better credit histories. In home loans or car loans, a part of the price is to be paid by the borrower before the loan can be disbursed, and this margin amount is likely to be slightly higher for a person with a bad credit history. For credit cards, a bad credit history causes higher annual fees and lower credit limits.
It is therefore, very important that we apply for a loan or credit card only if necessary, and if we are sure of being able to repay on time, because if we are not careful, these can give us a bad credit history which will make life really difficult in the future.