Your credit report is the acknowledgement of your past payment history. A lender examines your score to determine your affordability for a loan. A thorough check of your past payments is a must, even for a small emergency loan. It determines how much interest you will be charged. The higher the credit score, the lower the interest rate and vice-versa.
A bad credit score will not get in your way when you are to borrow a small sum of money. Interest rates will be high, but that should not bother you as you will be free from debt once and for all in a month.
But a poor credit score brings a lot of complications along when you are to borrow a large amount of money like mortgages. Your lender will call your affordability into question and, therefore, might turn you down. You should always try to improve your credit score before putting in a loan application.
Ways to do up your credit score
Here are some easy ways to make your credit file look good:
Build your credit history
Your credit score will be zero if you never borrowed money. A lender cannot assume that you will be a default borrower as there is no sign of it. Even so, they will be skeptical about your repaying capacity. You should build your credit history to demonstrate that you can make payments on time.
- Use a credit builder loan to build your credit score. They are small loans and are paid back over a period of six months. Your lender will report your payments to credit agencies. If you pay back the whole debt on time, you will have a good credit score.
- You should open a credit card and use it to make small purchases. Make sure you do not use more than one-fourth of your credit card limit. Pay off the balance in full within the grace period.
- You should become an authorized user of someone’s credit card. It will let you benefit from their purchases.
Once you have a credit history, your lender can easily make a decision whether to sign off on your application.
Make regular payments on time
Your bad credit score can be fixed if you start making payments on time. Pay off your bills and credit card balances on time. If you are already under debt, come up with a strategy to settle your accounts. Stick to making a minimum payment every month.
You can consider using a personal loan with bad credit to pay off your outstanding accounts. It will ease the debt pressure. Talk to a financial advisor in case you cannot come up with the right solution.
Keep old accounts open
You may be tempted to close your old credit card account to save on fees, but remember that your lender will check the length of your credit. Closing of older accounts will ruin your credit score because it increases your credit utilization ratio. Understand this with the following table
Case 1 | Case 2 | |
Credit card 1 | $500 (unused) | closed |
Credit card 2 | $1,000 ($600 balance) | $1,000 ($600 balance) |
Credit card 3 | $500 ($400 balance) | $500 ($400 balance) |
Total credit card limit | $2,000 | $1,500 |
Credit card balance | £1,000 | $1,000 |
Credit card utilization ratio | 50% | 66.67% |
Do not link to your partner with a bad credit score
A large amount of money is often borrowed jointly. Linking your credit report to someone with a poor credit file will have a negative impact on you. The default or missed payment will be recorded on your credit report as well. It will affect your borrowing ability in the future. Lenders will restrict the loan amount and charge high interest rates.
Check your file after the rejection
There is no guarantee that your lender will give you the nod. Do not sit on your laurels. You should rather figure out the reason why you got turned down. Ask your lender if they can let you know. However, they are not bound to give you a specific reason.
Remember that the three digits you see in your credit file are just for you. Lenders do not pay heed to that. They have their own criteria to assess your affordability. You should grab your credit report to find out the possible causes of rejection. Consult a financial advisor if you are clueless.
Additional steps to improve your credit score
Here are the additional steps you should take to make your credit report impressive:
- You should register on the electoral roll. Your current address will be verified from there.
- Make sure your credit file does not contain any errors or discrepancies.
- Check you are not the victim of identity theft. Someone can steal your credit card information.
- Do not apply for a loan immediately after being rejected.
- Avoid applying to multiple lenders at the same time.
- Pay your rent on time to boost your credit points.
- Do not withdraw cash on your credit card, as interest rates will be dramatically high, and there will be no grace period.
Bear in mind that quick emergency loans cannot help improve your credit health because they are paid in a lump sum. A lender wants to see your ability to stick to payments over a length of time, and therefore, installment loans come in handy.
The final word
Once there is a record of missed payments and defaults on your credit file, they will drop off at their respective time. No amendments can fix that score. However, your financial behavior will protect it from worsening. You should periodically check your credit report in case there are unfamiliar accounts.
A credit builder loan can help you fix your credit health, provided you pay back the debt on time. Apart from that, you should avoid having a balance on your credit card. It can take a long time to improve your credit health, so do not lose hope. For more such informative articles, visit here.