Chapter P5, Problem 3RQ

To determine

The reason why lenders have an interest in credit history

Explanation of Solution

Due to the following reasons, lenders have an interest in credit history:

1. It helps lenders to know about the expected credit behavior of a person in the future which make the lender ensure about the repayment of loan. If a person has bad credit score, then lenders do not offer loan to that person as there is high risk that the person will nor repay the loan. Therefore, it provides them an insight to determine the expected behavior of the borrower through which they can make lending decision.
2. Credit score also helps lenders to set an interest rate because credit score provides the information about borrower’s payment history and current economic condition through which lenders can fix interest rate. For instance, if a person has highest credit score, then the interest rate would be lower for him/her.
3. Credit score supports the lender to know the credit risk to provide additional credit according to the credit report of the borrower.

Economics Concept Introduction

Introduction: A credit score represents a person’s numeric information about the history of credit payments in the credit report that shows how likely a person can repay the loan.