Since borrowers don't know the finance companies that give them the money they need to buy real estate on a personal level, there needs to be a way for these companies to figure out the risks associated with each applicant. Because of this, every lender will get a copy of the loan applicant's credit profile. This information will be used to evaluate the risk and decide whether or not to give the loan.
Your credit report is a record of how you handle your finances. The independent organisations that keep your credit profile are just keeping track of your financial history. All lenders, as well as many other businesses and groups, will tell the credit bureaus about their interactions with customers. People are creatures of habit, so it's rare for someone to change the way he handles his money.
Your credit report shows how risky it is for a lender to give you money. Because of this, getting a credit report seems like a fair and accurate way to judge risk. With an applicant's full credit history, which can go back decades, a lender can look back in time to see how the applicant handled other loans or credit accounts. Depending on the consumer's track record, each lender will decide how risky it would be to their organization to loan such substantial sums of money to that individual.
Based on how risky the lender thinks the loan is, an interest rate will be put on it. The interest on these loans is how the lender makes money and makes up for the risk of giving out very large amounts of money. Applicants with better credit scores will be seen as less risky, so the lender won't worry as much about possible losses. This is because the borrower seems to have a better routine.
