The Importance Of Credit Score And How They Help In Availing Loans
Over the last few years, loans have become one of the most used financial services in the world. Applying for a loan is quite easy but getting approved on the other hand is a completely different game altogether. Loans can help people solve their financial problems or it could drown them in debt.
Credit scores are one of the most prominent determinants of whether a person is eligible for a loan or not. Credit scores tell the lenders about the applicant’s financial behaviour and creditworthiness.
When you have good credit scores then lending institutions will not look at you as a financial risk. But on the other hand, if you have poor credit scores then your chances of obtaining a loan reduces drastically.
Having good credit scores means that your loan application for any kind of loan like a payday loan, secured loans and unsecured loans will be approved and furthermore, it will also help you in getting reduced interest rates.
Banking firms and lenders look at your credit worthiness by performing credit checks, these checks help the lenders understand if you have the ability to pay back the loan or not.
There are two types of credit checks that are conducted, they are mentioned below
Soft Credit Check
Soft credit checks are the type of checks where the lender looks into the credit background of the borrower only from the surface. The lender will not perform an in depth credit check. But the main reason as to why people prefer this type of credit check is because it does not affect their credit score. Yes, you read it right, soft credit checks will not impact your credit score in any way nor will the search be recorded in the credit report.
Hard Credit Check
Hard credit checks are the type of credit checks where the banking firm performs a complete thorough credit check on the applicant’s credit background. This extensive search will help the lenders understand if the applicant has the ability to pay back the loan or not and they will make their decisions based on that fact.
But the downside is that a hard credit check leaves a mark on the applicant’s credit report and it could affect his/her credit rating.
Credit Scores
As mentioned above, credit scores are the primary determinant of whether a person is eligible for a loan or not. Credit scores are nothing but a set of numbers, that represents a grade on a scale set by credit agencies. The UK has 3 major credit agencies, namely, Experian, TransUnion, and Equifax.
Each of these credit agencies use their own scale, here are the scales of all three
Experian Credit Score Scale
| Score | Rating |
|---|---|
| 0-560 | Very poor |
| 561-720 | Poor |
| 721-880 | Fair |
| 881-960 | Good |
| 961-999 | excellent |
TransUnion Credit Score Range
| Score | Rating |
|---|---|
| 0-550 | Very poor |
| 561-565 | Poor |
| 566-603 | Fair |
| 566-603 | Good |
| 604-627 | excellent |
| 628-710 | Excellent |
Equifax Credit Score Scale
| Score | Rating |
|---|---|
| 0-560 | Very poor |
| 561-565 | Poor |
| 380-419 | Fair |
| 420-465 | Good |
| 466-700 | excellent |
Every lender uses a different scale to measure the credit rating of the applicant. Furthermore, maintaining good credit scores should be something that should be given a lot of importance to. When you have good credit scores then the chances of acquiring loans are high and you will also get the loans with a reduced interest rate. This is something that you should keep in mind.
Listed below are some factors which tend to affect an individual’s credit score‘
- Loan repayment history
- Recently acquired loan
- Type of loan obtained
- Total loan amount that is owed to the bank
- Credit card bill payment history
Improving Credit Scores
With all that much being said about having good credit scores, it is also important to know how to improve your credit scores. But make no mistake, the process of boosting your credit score is a long one, it will take a lot of time and effort, but in the end it is worth it. With good credit scores you can obtain any type of loan.
But then again, the problem of maintaining a poor credit score is pretty common among people.
As mentioned earlier, there are several ways through which you can improve your credit scores, it mainly depends on the effort you are willing to put in.
Reviewing your credit reports is actually quite an important thing to do. You have the option of taking out a credit report only once a year. You can obtain your credit report from any credit agency. Reviewing these credit reports in a thorough manner will help you understand where you’re lagging behind when it comes to credit scores.
Making your loan payments on time will most certainly help you boost your credit scores. When you make your loan repayments on time, it basically tells the lender that you are a trustworthy individual, which is very important when it comes to taking out a loan. Moreover, it will also help you build a financial discipline.
If you have too many loans to pay back, then consider opting for a debt consolidation loan, it will help you accumulate all your loans and you will have to pay back only one loan, but using a debt consolidation loan may affect your credit score.