Loans have known to be quite helpful to several people in various different ways, but acquiring a loan is a whole different ball game.
If you want to take out a loan, you should have a good credit history and score.
Although you can get a loan with poor credit scores, the interest rate charged will be high. If you have a high credit score, the interest rate charged will be low. A car lease is a type of installment loan. When you lease a car, you should know what credit score is needed to hire a car.
Remember that your credit score is the primary determinant that helps financial institutions decide whether you are eligible for a loan.
Credit Score: What Are They?
When you think of loans, the first thing that comes to mind is your credit score. But people starting out may ask, what is a credit score?
In simple terms, a credit score is a set of numbers that helps financial institutions and banks determine who is eligible for a credit score and also determine the APR they set on loans once they are approved.
A credit score is determined by an individual’s credit history. This is mainly done to determine whether the individual can repay the borrowed amount. The UK has three main credit reference agencies: Equifax, Experian, and TransUnion. These credit agencies determine the creditworthiness of individuals, which will later help financial institutions determine whether they are eligible for a loan.
Below are certain factors that affect an individual’s credit score, so pay attention to these if you want to obtain a loan in the future.
Delay In Payments
If you’ve taken out a loan previously and failed to repay it within the specified period of time, that will show up in your credit history. Even if you fail to repay your credit card bills in time, it will show up in your credit report, bringing your credit score down.
So whenever you take out a loan or use your credit card, make sure you pay back the borrowed sum within the specified period of time. This will help boost your credit scores.
No History Of Taking Out A Loan
If you’ve never taken out a loan or used a credit card before, acquiring a loan becomes a herculean task. That is due to a lack of financial activity on your part, which means financial institutions cannot decide your creditworthiness.
Country Court Judgement
If the borrower happens to have a country court judgment against them, it means that they have taken a loan and failed to pay it back, and the financial institution or lender has taken this particular issue to court to make sure he gets back the money he loaned.
Having a country court judgment to your name is bad as it may lower your chances of obtaining a loan.
Credit Checks
A credit check is when a lender or financial institution examines individuals' credit histories to understand their financial situation and behaviour. This is also known as a credit search. Although consent is not required to conduct a credit search, lenders must have a good reason to do so.
Two types of credit searches can be conducted.
Hard Credit Check
A hard credit check is when the financial institution extensively examines the borrower's credit and financial history to ensure that the borrower can pay back the borrowed money within a reasonable time.
Since hard checks are thorough checks, they may affect your credit scores.
Soft Credit Check
A soft credit check is where the financial institution or the lender looks into the borrower’s credit history without recording it on the search history. A soft credit check is a superficial one, it is not a complete credit check. This is done to make sure that the borrower can pay back the borrowed sum, furthermore, a soft credit check does not leave a mark on the borrower’s credit history and will not affect his credit score in any manner whatsoever.
Credit Score Ranges In The UK
As mentioned above, the UK has three main credit bureaus: Equifax, Experian, and TransUnion. These bureaus set the scale for credit scores, which are used by financial institutions and lenders to determine the creditworthiness of individuals applying for loans.
Listed below are the credit scores scales of Equifax and Experian
Equifax Credit Score Scale
Score Rating
0-279 Very poor
280-379 Poor
380-419 Fair
420-465 Good
466-700 Excellent
Experian Credit Score Scale
Score Rating
0-560 Very poor
561-720 Poor
721-880 Fair
881-960 Good
961-999 Excellent
Improving Your Credit Score
As you would have understood the importance of credit scores, knowing how to improve them is equally important. When you improve your credit scores, it will also improve your ability to take care of your financial obligations more responsibly.
There are several ways to improve your credit scores. Make sure you keep each of these pointers in mind.
- When you use a credit card, make sure you stay inside the predetermined credit limit. Going over the credit limit may hurt your credit score.
- Paying all your credit card bills on time will only help you improve your credit score.
- You can use Credit Builder loans to help you improve your credit score. These loans are designed to help individuals improve their credit scores.
- Try not to delay payments, if you have a history of not paying your loans or credit card bills on time, then financial institutions and lenders will think twice before they give you a loan.
Overview
These are some of the most important things about credit scores and loans. Keeping these pointers in mind will help you gain access to loans you may require in the future.
