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 then you should have a good credit history and a good credit score.
Although you can get a loan when you have poor credit scores, the rate of interest charged on your loan will be high. If you have a high credit score then the interest rate charged will be low. A car lease is a type of instalment 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 main determinant that helps financial institutions decide whether you are eligible for a loan or not.
Credit Score: What Are They?
When you think of loans, the first thing that comes to mind is your credit score. But people who are just 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 to see who is eligible for a credit score and also to determine the APR they set on the loans once it is approved.
A credit score is determined by the individual’s credit history. This is mainly done to determine if the individual can repay the borrowed amount or not. The UK has three main credit reference agencies, namely, Equifax, Experian, and TransUnion. These credit agencies determine the creditworthiness of individuals that will later help financial institutions determine whether they are eligible for a loan or not.
Listed below are certain factors that affect an individual’s credit score, so make sure you 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, then that will show up in your credit history. Even if you fail to repay your credit card bills in time, it shows up in your credit report and it brings 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, that will help in boosting your credit scores.
No History Of Taking Out A Loan
If you’ve never taken out a loan before or never used a credit card then acquiring a loan becomes a herculean task. That is due to a lack of financial activity from your side, because of which financial institutions cannot decide your creditworthiness.
Country Court Judgement
If the borrower happens to have a country court judgement against them, it means that they have taken a loan and failed to pay back the loan 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 judgement to your name is bad as it may lower your chances of obtaining a loan.
Credit Checks
A credit check is where the lender or the financial institution looks into the credit history of individuals to comprehend their financial situation and behaviour. This is also known as credit search. Although there are no requirements for consent to conduct a credit search, the lenders must have a good reason to conduct one.
There are two types of credit searches that can be conducted.
Hard Credit Check
A hard credit check is where the financial institution looks into the borrower's credit and financial history in an extensive manner, this is done to make sure 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. They set the scale for credit scores and that is used by financial institutions and lenders to determine the creditworthiness of the individual who is applying for a loan.
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, it is equally important to know how to improve your credit scores. When you improve your credit scores, it will also improve your ability to take care of your financial obligations in a more responsible way.
There are several ways through which you can improve your credit scores, make sure you bear each of these pointers in mind to improve your credit score.
- 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.
- Make sure you pay all your credit card bills on time, it 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 an individual 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 you should know about credit scores and loans. Keeping these pointers in mind will help you gain access to loans that you may require in the future for whatever reasons.
