importance of a credit score

Why Is My Credit Rating Important to a Lender?

How many of us really know what credit rating is? Yes, we hear a lot about it when we open our bank accounts or we read about it in an article but we still have little to no idea as to how it can affect us, how to manipulate it and why it is so important to our lender.

 

How many of us really know what credit rating is? Yes, we hear a lot about it when we open our bank accounts or we read about it in an article but we still have little to no idea as to how it can affect us, how to manipulate it and why it is so important to our lender.

If you are having problems understanding the notion of credit rating, then you are in luck. We’re here to help you understand your credit rating and how it can impact your lending capabilities.

What Is a Credit Rating?

Credit rating otherwise known as a credit score is a number that represents your credit situation. This numerical grade is generated by a credit bureau. The number is influenced by a number of factors such as payment history, debt and the length of credit history. The higher the score, the more advantages you get when you request a loan. The lower your rating or score is, the more restrictions you get on your loan or financial services. And in some instances, your request may get denied.

So why is your credit rating important to a lender?

When you apply for a loan, a lender will assess your financial situation to determine whether or not you are worthy of a loan. One of the first and most important factors they will consider is your credit score.

With the comprehensive credit reporting system in place, lenders have more access to information on your credit file. They can see your credit card repayment history along with any defaults placed on your file.  Coupled with your credit score, they can quickly decide whether or not you are worthy of loans.

They will have no problems lending you money when they see that you have a positive credit score, that you have no problem paying your debts and have a decent financial gain every month.

lender rejecting a loan application

But what if you have a low credit score?

In such a case, the lender might see you as a financial risk. For this reason, they may choose to reject your loan application. Alternatively, they can offer a secured loan. Secured loans require an asset such as your car or property to be used as collateral for your loan. Other restrictions include higher interest rates or lower borrowing amounts. 

It all depends on your financial situation plus the way you handle your debts. Besides your credit score, a lender will check if you have any defaults if you pay your debts on time if you have bankruptcies, court judgments, personal insolvency agreements or debt agreements.

As you can quickly see, your credit score has become more important than ever. If you plan to buy a house, take out a personal loan or start a business, you can get rejected. The last thing that you want is to be denied due to your credit score. For this reason, it is crucial to stay on top of your credit file. Check it often and make sure that you remove any credit issues as these can further impact any hopes of securing a loan.

What Credit Score Do I Need?

Before we start talking about credit scores, it is important to know that there are different credit reporting bureaus in Australia. The three main credit reporting bodies in Australia include Equifax, Experian, and Ilion

These bodies have different credit scoring systems that are used to calculate your credit reports.  Different lenders may request information from one of all of the credit bureaus. For this reason, it is helpful to know which one is being accessed. In terms of which one is the best – there is no best. They all serve the same purpose. Each one uses a unique method of accessing your credit information. As such, they may have different information in your file.

Experian Credit Score

Excellent

800 – 1000

Very good

700-799

Good

625-699

Fair

550-624

Weak

0-549

Equifax Credit Score

Excellent

833-1200

Very good

726-832

Good

622-725

Average

510-621

Below average

0-509

What Affects My Credit Score?

Your credit rating can be affected by many factors. Here are a few things to consider:

  • Payment history

Making late payments on your loan or your credit card, applying for credit cards or loans too often or applying and being rejected for a loan or a card. Also, having debts over $150 that are overdue for sixty days or more is bad for your credit rating.

  • Balance transfers

Multiple balance transfers on your credit card or getting a balance transfer on your credit card but not repaying it by the end of the promotional interest rate period can also impact your credit score.

  • Hard Inquiries

Before you start applying for loans, check your credit score. Each time you enquire about a loan, you may have a hard inquiry placed on your credit file. Too many of these are bad, as they can decrease your credit score. They are also visible for lenders to see.

How to Fix Your Credit Rating?

If you want to get a positive credit score, you will have to pay your bills on time and not apply for new credit cards or loans. Always pay off outstanding loans and credit card debt and make your monthly repayments on time every month. You should always have a low balance on your credit card.

Also, hang onto those good credit accounts where you have made your repayments on time for several years. Having an available credit limit that is higher than your credit balance is also good for your credit.

Credit repair is possible. Specialised agencies can help you to dispute defaults, blackmark and listings. They are extremely knowledgeable and can quickly determine if your credit file has any errors or discrepancies. If a credit repair agency can successfully improve your credit score, you must ensure that you develop positive money habits. The last thing that you want is to fall back into your old habits.

The bottom line

It has become more important than ever to make sure that your credit file is on point. Lenders will immediately look at your credit score to determine whether or not they will approve your loan. If your score is bad, you may have to deal with stricter lending terms. At the end of the day, it is up to you to develop positive credit habits.

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