Want to renovate your home, buy a car or travel overseas? Taking out a personal loan can help. This is one of the best ways to get the cash you need to turn your dreams into a reality.
However, if you have a bad credit score, your loan application can get rejected.
Credit Score and Loan Application
A credit score is a numerical representation of how financially trustworthy you are in the financial institutions’ perspective. This is a summary of your credit history.
It is calculated based on what is found on your credit file. Both positive and negative information will be taken into account. If, for instance, you have paid your previous loans before their due dates, your credit score will improve. But if you miss even one bill payment, you can get a low credit score. It is a system wherein prompt payments are rewarded and late payments are penalized.
Other factors that affect your financial credit rating include:
- The number of accounts you have recently opened
- The age of your existing line of credit
- The payment history for your household expenses like energy bills
- Any outstanding debts
- Your youngest and oldest accounts
- How active your accounts were
With this information, the bank or lending institutions can figure out whether you are eligible to borrow from them, how much they can grant you, and the interest rate that you need to pay.
With an excellent credit score, lenders will have confidence that you will be able to pay your loan on time. You can even have access to a high personal loan with a low-interest rate. On the contrary, a low credit score can be a reason for lenders to reject your application. In cases where they can grant you a loan, the interest rate might be a bit higher.
Although other factors (such as your current employment status, monthly income and expenses, and how long you have been employed) are also considered when taking out a loan, your credit score is a huge determining factor.
How to Boost Your Credit Rating
1. Check your credit reference file regularly
Lenders will compute your credit score depending on your credit reference file. Errors can happen, so make sure to check it regularly, preferably annually or before taking out a loan. Like reading an agreement, you have to check every line to make sure there are no mistakes. Things you should look for will include an incorrect address, a credit card you are not using anymore, and an old phone number.
And if you find any negative data on your file, you should make a legitimate credit dispute. This is the proper way of dropping off those outdated and erroneous data.
2. Always pay on time
Even if you are financially struggling, make it a point to make payments on time. Missing even a single repayment can negatively affect your credit rating.
If you have a credit card, for instance, you should pay your bill by the due date. Paying a part of your bill on time is enough to achieve a good credit score.
3. Reduce your debts
Lenders will have access to the amount of any outstanding debts that you have. Of course, too much debt will damage your reference file. So it is best to minimize your debts. For example, you can use your savings to pay off your debts whenever possible.
4. Inform credit reference agencies of canceled joint finances
You and your partner have created a joint bank account years or months ago. But for whatever reason, you decided to split up. Now, you have to make sure that you are also no longer financially linked.
Moreover, notify the credit reference agencies and request for a notice of disassociation. This is imperative to prevent the credit history of the joint account from affecting your credit scores later on.
5. Avoid withdrawing cash on your credit cards
Aside from being expensive because of its high interest rate, withdrawing cash on your credit cards can be a reason for lenders to turn down your loan application. Most lenders consider this as proof of your poor money management skill.
Due to the fact that your credit score will have a huge impact on your personal loan application, make sure to have an excellent credit rating. Implement these ways to boost your credit score now so you can easily take out a loan with a low interest rate later on.