Certified Financial Management Specialist Practice Exam

What is meant by the term 'credit history'?

1. A record of savings account balances

2. A summary of a borrower's creditworthiness

3. An analysis of loan terms

4. A history of bank withdrawals

The correct answer is: A summary of a borrower's creditworthiness

The term 'credit history' refers to a summary of a borrower's creditworthiness, which is essential in assessing their ability to repay borrowed funds. This history includes detailed information on credit accounts, such as the types of credit used, payment history, amounts owed, and any public records such as bankruptcies or defaults. Lenders utilize this information to determine the risk involved in lending money or extending credit to an individual or business. A strong credit history indicates reliability and responsibility in handling credit, leading to better terms and lower interest rates for future borrowing. Understanding credit history is crucial as it reflects the borrower's past behavior in managing debt and financial obligations. Other terms like bank withdrawals, savings account balances, or loan term analyses do not encapsulate the comprehensive overview that a credit history provides regarding an individual's overall credit management.