A loan is an amount of money that is lent to another individual in exchange for future payment, plus interest or other finance charges. You can get a loan from your bank or a lender in your area. There are different kinds of loans that you can apply for depending on your needs. So far, the most popular kind is a personal loan since it is not restrictive about where you spend your funds. However, many factors can affect your application for borrowing money, and one of the biggest factors is your credit score. If you happen to have a bad credit score, then you will have some difficulties applying to lenders unless you look for bad credit loans.
So before anything else, here are some of the essential information you need to know about credit scores, why they matter, and what you can do to improve your score.
What is a Credit Score?
If you are a loan newbie, then you might not know what a credit score is and why it is important. For starters, a credit score is a representation of your trustworthiness as a borrower. It is what gives your bank or lender a summary of how risky you are as a client. Your credit score can help these establishments determine whether to accept or reject your application and how much your interest rate and credit limits should be.
Simply put, it is a score that indicates the likelihood of you repaying the loan or running away from it. As you can see, a credit score is a crucial form of documentation that assists lenders and banks in defining how well you manage financial responsibilities. It will help you if you have an idea what lenders and credit reporting bodies (CRB) are looking for to ensure a higher chance of getting approved.
Importance of a Credit Score
As mentioned previously, your credit score is one of the most crucial factors that helps a bank or a lender to determine whether they should approve your application. Your credit score is also used to determine your interest rate; naturally, the higher your credit score, the lower your interest rate. Conversely, the lower your credit score, the higher your interest rate. But if your credit score is really bad, then you will have better chances of getting approved if you apply for a bad credit loan instead of the standard ones.
So as you can see, your credit score significantly affects the offers available to you. Aside from the interest rate, it can also affect the term of the agreement, and the amount of money lenders or banks will be willing to let you borrow.
Although loans are financial products that are meant to help people, it is still a business product at the end of the day. If your bank or lender thinks of you as a high-risk borrower, then it makes sense that they would want to increase your interest rate to ensure that they don’t take a significant loss in the case that you are unable to make the rest of your repayments.
Your credit score is an important part of the loan application process as it says a lot about your financial history. Your credit score is the summary of the money you have borrowed in the past, your applications, enquiries and your record of paying off your past debts.
Different Sources of Credit Reports
There are two kinds of credit scores, and they come from different sources. These two sources can be different from each other.
The first kind of score comes from a credit-reporting agency. Files that are related to your credit score are accessible to all credit providers and lenders to help them assess your eligibility for a loan.
Keep in mind that there are many credit reporting agencies out there, so there will be some differences in their scoring system due to the lack of a universal system regarding this matter.
The second kind of credit report is done internally by the credit supplier or the lender that you are applying to for your loan. They will be using their own system of scoring. They will base their assessment on the information that you provide them through your application forms and supporting files.
Regardless of where the score came from, it can only be as accurate and as reliable as the sources of information. The more data available to the credit reporting agencies or the lenders, the more accurate your score will be.
How Do You Improve Your Credit Score?
As consistently emphasised in this article, having great a good credit score can open up a lot of opportunities for you when applying for a loan. It does not limit your options. This is why your score is so important.
But even if you have a low credit score, there are still some options available for you, such as bad credit loans. However, if you still have some time to spare before you absolutely need to apply for a loan, there are some things that you can do to improve your score. Here are some pointers to help you increase your credit score for more loan options:
1. Be mindful of your due dates.
It really pays to be a responsible individual. Did you know that how you pay your bills plays a role in determining your credit score? You should be mindful of the due dates for your monthly bills. Make sure that you pay your electricity, water, phone and credit card bills on time.
Although there is sometimes a grace period for late payments, it is still best that you don’t make yourself comfortable relying on these advances. Make sure that you prioritise these bills before anything else. If you don’t trust yourself with dates, you can set up direct weekly, fortnightly or monthly payments. This does not only make sure that you always pay your bills on time, but it also minimises the risk of panic when you receive an unexpected number of bills at the same time.
2. Go easy on your credit card and your credit card limit.
It would be for your best interest if you can lower the limit of your credit card or minimise its usage in general. Doing so can help you avoid excessively spending on things. This can also help you improve your credit score.
Other things you should consider are looking for cards with no annual fees, lower interest rates or one that has an initial period of no interest. But keep in mind that you should limit how many credit cards or loans you have.
3. Watch how many applications you submit.
Your credit score is not just about the amount you have borrowed or how many loans you have taken out or paid back. Your credit score also reflects all the applications you have submitted and how many enquiries you have made. If you applied to a variety of loans that were rejected, then it is bound to stand out to lenders and banks as a red flag.
There are other factors that can affect how lenders and banks see your application. You should definitely do your research and make sure that you meet the set of criteria a particular establishment has for their applicants. No matter how good your credit score looks like, if you don’t meet one or two of a lender’s conditions, then you cannot expect your application to get approved. Not paying attention to details like this can leave you with a bad record. You still have bad credit loans as your option, but maintaining a good credit score definitely gives you more options.
Getting Rejected Despite Good Credit Score
Keep in mind that despite being one of the major factors to look out for, your credit score is not the only thing that determines the fate of your loan application. There are other details that lenders and banks check when making a decision. It would help if you also looked at factors such as your income, savings records, and how well you manage your expenses. Taking care of these other details can help you stir the lender’s decision in your favour.
The Final Takeaway
Although it is not the only factor that you should be mindful of when applying for a loan, your credit score sure does play a big part in the lender’s decision making. Maintaining a good credit score helps you get better offers with better rates and ideal terms.
Low interest-rates (for loans) or higher credit limits (for credit cards) are perks only available to people who have good credit scores. There are still bad credit loans, which you can consider as good deals, but it cannot get to the level of a standard offer for good credit score holders.
Based on that, you can tell that it is definitely worth improving your credit score to get more benefits and advantages in the long term.