Our society lives and thrives on credit. There are more and more lenders offering loans to different people. Many of these loans, such as credit cards and personal loans, are unsecured. This means that the lender is offering loans based on the reputation of the borrower rather than the number of assets he has as collateral. It is therefore essential that they have the required information before they make their decision. This information is provided in the form of a credit score.
Lenders Collaborate: Almost any loan that you take can be traced back to a few lenders. Thus, all the lenders have most of the information, amongst themselves, they need regarding lending the money. It is for this reason that they have set up credit bureaus. It is in their interest to submit information about every transaction with every borrower. The aggregated information gives the prospective lender a good idea about the creditworthiness of an individual. Every lender works for it and gets the benefit.
Periodic Reporting: Lenders report periodically to a third party organization. Usually they report every month or so.
Point System: Instead of considering the vast variety of information that a credit report may bring along, lenders usually look at a score. The point system has been well developed and provides the lender a good idea of the creditworthiness of an individual. For every favorable credit deed, such as paying bills on time, there is a positive score. Similarly, for every negative deed there is a negative score. This point system ensures that lenders do not have to deal with complex information.
Differential Interest Rates: People with good credit scores get the rewards in the form of lower payments, while people with bad credit scores are penalized.