Every now and then, almost all of us find ourselves in a position where we need to borrow cash. Almost always this happens when money is tightest and getting credit is not always easy. These days banks, mortgage companies, and other lending institutes are more choosey about who they lend money to, because they are unwilling to have bad debts (those the lender does not pay) affect their bottom line.
The information that’s on your credit file
Lending institutes take into account a number of factors when they are considering whether to approve your loan application. One of the most important factors is what your credit report says about you. There are three main credit reporting agencies:
Each of these has a version of your file. Your credit report contains all sorts of information about your financial history, including your mortgage, credit cards, and any other loans.
When you apply for a loan, the information in your credit report in combination with other information about your financial status is used to determine your credit score. Contrary to what you may have been told, there in no one single credit score. There is also no credit blacklist. There is just information that credit reporting agencies provide to lenders. In turn, each lender has their own formula for calculating a person’s credit score. This is why you might be successful with one lending institute but not with another.
What causes credit score damage
Your credit score is simply an indicator or measure of your credit worthiness. Individuals, who have managed their debts well in the past, generally don’t have much of a problem arranging credit when they need it. But those who have made late payments on their loan (even one), or missed a payment on a credit card, could have it affect their credit score negatively, as it does show up on your credit file. If you have filed bankruptcy, had a judgment against you, or had other financial problems, these will also lead to a poor credit score.
What if I am a first-time borrower?
A number of lenders hesitate to lend funds to anyone who hasn’t borrowed money before. It does sound odd, but it is because as a first time borrower you do not have any record, good or bad, for the lender to base their decision on. This makes it hard for the lending institute to assess your credit worthiness. So, if you find it hard to borrow money for the first time, don’t be surprised. However, when you do manage to get that first loan and you prove your worthiness, the next time will be much easier.
High interest rates
Many mainstream lenders will not take on borrowers that have a poor credit score, but there are several specialist lenders that will offer personal loans to those who have a low credit score, although you should be aware that the cost can be high. Yes, banks and other lending institutes advertise low interest rates that will tempt you. But only around 51% of applicants will qualify for these low interest rates. In other words, nearly half of all borrowers will pay significantly higher rates.
If you have made one or more late payments on a loan or you have been late or missed a credit card payment, this will show on your credit report and have a negative effect on your credit score, causing you to have to pay very high interest rates.
Advice for your debt
High rates associated with personal loans for those with a poor credit history make it even more important for you to compare interest rates and the cost of borrowing so that you can get the best deal possible. You should also only get a personal loan if you are confident you can comfortably add more debt to your existing debt load. If you feel you may find yourself in financial trouble, it is best that you seek the help of a free counseling service.
How you can improve your credit score
There are several ways for you to improve your credit score. For example, try to avoid making frequent credit applications, as lenders are wary when you have been turned away by other lenders. Make sure that you are registered on your electoral roll and make sure that your credit file is current and accurate.
You also will want to show lenders that you can control your finances by the way you manage your debts. If you have a bad credit history, getting a personal loan can help if you make sure to make your monthly payments in full and on time, because this lets you prove to the lender that you have learned from past mistakes.