What is Credit Score and Credit Risk?
Your credit score is a three digit number calculated from your credit report and it used to gauge liability when taking out a loan. It is used to determine if you will pay back your loans on time. The lower the credit score, the higher the credit risk for the lender.If you have a lower credit score the bank feels that you might not pay back on time, then they will usually offer you a higher interest rate on the loan.
How do Credit Card Companies Make Money from Loans?
The extra interest is what enables the companies to profit from your loan. For a card with 0% interest, the company stands to make absolutely no profit. The profits are made only when the customer goes late on the payment and becomes liable for high interest rates. This is especially true for cards with high rates – that are around 13% or more. In fact, studies have shown that credit card companies make 3 times more money from sub-prime borrowers than from prime borrowers. In fact the Fed recently pointed out that credit card earnings for banks have been consistently higher than all other commercial bank activities and the major chunk of money is made only through the interest charged on outstanding balances. What this basically means is that the lower your credit score, the more the credit card company can make off of you and the more it will cost you.
Do Companies Prefer People With Higher Risk?
Yes. Not only do they prefer them but they go out of their way to ensure that most people have a low credit score and can be charged ridiculously high amounts. A study has shown that 93% of all credit scores contain errors. These errors affect your score when you take a loan. It is naive to assume that this just happens by chance. In fact, many creditors make minor adjustments to your credit report to ensure that high interest rates can be levied on the customer.
How do Companies alter the Credit Report?
There are many ways in which companies damage the credit score of customers. One common method is changing the date of last activity on the credit report. They make derogatory account information appear first, reducing the credit score drastically. For example, if you go late on a payment then it is supposed to be shown on your report for 7 years, but companies sometimes change the date to make the negative report stay on your credit report for as long as 10 years. This reduces your credit score. Another common scheme is to show the same debt multiple times An unpaid balance is reported by a number of different companies so that it has more of a negative impact on your credit scores.These are just a few of the many tactics employed by unethical lending companies. Even though the system is supposed to be fair for all citizens, that is not the reality. You need to directly challenge the creditors in order to bring about any change to your report. Unless there is a direct confrontation, then the common people will continue to suffer under this kind of a system.