A credit history is needed in order to allow lenders to assess the risk of lending money to consumers. When providing debt a lender basically trusts that the borrower would pay back the debt plus the interest. If the borrower does not pay the lender has little that he can do. The lender can try to collect the debt by taking possession of collateral for debt that is taken against tangible assets but if the debt is for non tangible usage the lender might be at a dead end and have to write off the debt as a loss.



It is clear that lender would like to have a way to know what is the risk of lending money to a specific borrower. The higher the risk is the higher the interest rate that the lender would ask for in order to cover that risk. If the risk is too high the lender can decide not to lend at all. If the risk is very low the lender can provide attractive low interest offers that will make the borrower more likely to lend money.

When assessing the risk the first thing the lender is looking at is the credit history score. This score also known as the FICO score provides a high level measurement of the borrower quality. If the FICO score is too low the lender might decide not to lend money to that borrower. If the FICO score is adequate for lending the lender will spend more time and money in assessing the full detailed credit history report to better evaluate the risk.

The lender will look at many different parameters. One of them is the length of the credit history also known as revolving history. If the borrower is for example a new immigrant he might have a good score but a very short credit history that represents a risk. The lender will further look at the borrower employment history and at how long the borrower was employed. Most borrowers default on their payments when losing their jobs and it is not surprising that assessing the employment history is a very important component of the lender evaluation process. Some lenders will go a step forward and will call the current employer to get a reference of the borrower and to ensure the borrower indeed works at that job.

Yet another component checked by the lender is the ratio between the borrower annual income and the debt payments the borrower has to make. These payments will include any current debt payments plus the payments for the debt the borrower is applying for. Each lender has its own criteria for the relations between that ratio and risk. The lower the ratio the higher the disposable income the borrower have and the more likely the borrower is to make the payments in case his income goes down and some other costs of living go up.