Today, applying for a loan seems to have never been easier. Interest rates are comparatively low and competition among lenders for new business is intense. So it can come as a surprise when a loan application is turned down. The reason is often a bad personal credit score, but few people understand what that is, let alone how to improve it.
Having a good credit score can help you secure the best financial deals, but first you need to understand what your credit score is and what steps you need to take in order to improve it.
What is a credit score?
Credit reporting agencies collect information and calculate your credit score based on certain information. This information includes personal details such as: your age, location and how much you’ve borrowed (from who?), the number of credit applications you’ve made and any out standing or overdue payments. These could relate to a bank loan, rent, mortgage or even an overdue phone bill.
Lenders and credit providers such as banks and credit unions use this information to work out how risky it is to lend you money.
How do you find your credit rating?
The good news is that you can get a copy of your credit file once a year for free as well as your credit score from online sites such as Creditsavvy, Equifax (previously called Veda) and Finder (which uses Equifax scores).
Depending on the credit reporting agency, you will receive a number out of 1000 or 1200 that’s broken down into five categories, from excellent to below average. If you fall into one of the lower categories, lenders may ask for more information or deny you credit.
It’s worth checking your credit file before you apply for a loan to make sure the information is accurate and that you haven’t been the victim of fraud or identity theft. If there are mistakes, credit providers and reporting agencies are legally obliged to investigate and correct them free of charge.
Ways to improve your credit score
You can increase your chances of being approved for a loan by understanding your score, correcting any errors and improving your credit worthiness with these simple tips.
Pay your bills on time.
When you’re busy or on the move it’s easy to overlook a bill or to forget a payment. One way to avoid this is to set up automatic payments.
Lower your credit card limits.
You may think having a high credit card limit is a good thing, but it can actually count against you. Lenders consider your credit limit as a liability even if you never use the full amount and pay your balance on time and in full every month.
Consolidate your debt.
By consolidating several personal loans or credit cards into one it can make it easier to keep track of repayments and save on fees and interest.
Avoid making multiple credit requests.
Making lots of credit requests in a short space of time has a whiff of desperation about it and can lower your credit score. Do your homework, only consider a new loan or credit card when you need it and then apply for the options most suited to your needs.
Notify your credit providers if your circumstances change.
If you move make sure to tell your bank, other lenders and utilities so your bills will be redirected and you won’t accidentally miss a payment. If you’re planning to change financial institutions, then the same applies – you will need to contact your loan providers to switch over to automatic payments.
If you see an attractive investment or are about to start house-hunting then timely access to credit is critical. Knowing your credit score and improving it if necessary can not only speed up your loan approval but also help you negotiate the most competitive rates.
If you would like to discuss ways to tackle debt and get your finances in shape, give us a call.