Personal finance products such as loans, mortgages, credit cards and overdrafts play a vital part in our day to day lives, whether fronting us the money to make a key life change or simply helping us through a rough patch. Being accepted for them, though, is dependent on a reporting process which is poorly understood by many of the people applying for credit products. What is the impact of credit reporting on loan eligibility – i.e the ability to borrow and at what interest rate?
What is a Credit Score?
First, let’s look at the basics: what exactly is a credit score? There are many misconceptions regarding credit scores and reports, which can make it harder for consumers to arrange and manage their own finances. For one, credit scores are generated in report format, based on your financial history, and considered risk level, put together by one of three credit reference agencies.
A credit report takes into account various facts and metrics, including essential information like age and voters roll confirmation and more importantly your history of using financial products and repaying bills.
Higher credit scores are awarded where an individual consistently shows capability in managing debts and meeting bill payment requirements, and thus considered less of a risk to a bank or lender. Conversely, lower credit scores indicate that based on your history, you may be more likely to default on payments and considered a greater risk to said lenders.
Credit Score and Credit Applications
Banks and lenders utilise credit reports from these credit reference agencies as a standard but vital step in their underwriting and application processes. They do much of the heavy lifting for assessing risk on the part of the bank or lender, where late or missed repayments affect the returns they might see on their effective ‘investment’ in you. For this reason, lower credit scores are more likely to result in declined borrowing applications or higher interest rates being charged.
Alternative Means of Accessing Credit
For those with low credit scores, there are alternative means by which credit can be accessed. Not all loans require security, or a spotless credit history, from their applicants. In some cases, lenders might use a poor credit report to inform the terms they set for a given loan; others might require a guarantor if an applicant’s credit score is below a certain level.
For those with a poor credit history and score and outstanding debt obligations, there are bad credit loans specifically designed to help them manage their borrowing needs. Some credit can be used to consolidate existing debts and stave off action from lenders, while others can be a useful stopgap for sorting out longer-term financial solutions. The downside is that these kinds of credit often command higher rates of interest, which make it especially important for you to try and improve your record and score over time.
Improving Your Credit Score
Unexpected life events can happen, and the resulting costly financial situations can come about through no fault of the individual. However, poor financial literacy and poor management of money matters are at the crux of many poor credit report cases. It is vital that these elements are addressed if people are serious about improving their financial situation. Budgeting, refinancing, and even contacting debt support charities can all play a key part when it comes to trying to improve your credit score.
