The Reason for Credit Reports

Credit reports are a gift and a curse. For the reformed borrower, a credit report's seven-year span of derogatory information can be a major hindrance to starting a new financial future. However, credit reports are a valuable resource for creditors and borrowers. Credit reports can lead to increased opportunities for businesses to earn income and consumers to enhance their lifestyles.

Risk

One of the major reasons credit reports exist is to help creditors assess a borrower's level of risk. Instead of trusting the borrower's promise to repay a debt, a creditor can review factual information about the borrower's spending habits and past accounts. Borrowers with a high number of delinquent and charged-off accounts are a high risk to creditors. If a creditor chooses to lend to a high-risk consumer, it usually charges higher interest rates and fees to account for the fact that the borrower might not repay the debt. In contrast, creditors also use credit reports to find consumers with good credit to recruit new customers. When the debt is repaid on time, creditors get paid from interest charges over time without worry over an abandonment of the initial debt.

Major Life Changes

The information in your credit report is used to calculate a credit score. The higher your credit score, the easier it is for you to attain new credit accounts and loans. When you experience a major life change, a credit report can help you account for each transition. For example, if there is a death in the family, you can obtain a personal loan to cover the funeral expenses if you have a positive credit history. Also, buying a house, getting married and planning for parenthood can be simplified with a positive credit rating. With access to more credit through credit cards and loans, you have less financial worry in the event of an emergency.

Character

While credit reports do not always accurately reflect the character of the account holder, some employers use credit reports to validate the credibility of employees. Professions where honesty and responsibility are critical to the everyday success of the business require that employees have a good to excellent credit rating. For example, in the banking industry, tellers are generally required to have a positive credit score. The bank wants employees with financial integrity to mitigate theft and the mishandling of funds.

Prevent Theft

Credit reports help ensure the accuracy of your financial history. If someone else uses your Social Security number to open fraudulent accounts, your credit report will reflect this data. Also, credit reports include your personal information such as your address, employer and list of credit inquiries. If you notice any unusual information in your credit report, you can have the matter investigated with each credit bureau. Your credit report serves as proof that you are the victim of identity theft, which can be helpful in having derogatory accounts discharged that you did not authorize.