Raising the Credit Score to Apply for Loans
Having a good credit score is very important for individuals that are seeking approval for important loans such as mortgages, car loans and even tuition loans. All lenders view an individual’s credit score as an indicator of their financial stability and trustworthiness.
With a low credit score it can be extremely difficult to secure a loan of any kind, especially a mortgage or a loan over a few thousand dollars. The following information outlines how the credit score is calculated, how it affects the decisions of lenders, and how it can be raised to secure a loan.
What is a Good Credit Score
A credit score is a three digit number that depicts the financial credibility of an individual based on a variety of factors. The credit score is primarily determined by the individual’s experience with lenders and financial institutions. In general, conservative spending habits and responsible repayments will lead to a raised credit score, while late payments and heavy usage of the credit line will lead to a lower credit score. The credit score is an accumulative calculation derived from the total credit history of an individual or company, as decided by the three main credit bureaus – Esperian, Equifax, and TransUnion. Credit scores range from 300 to 850, with a score of 720 or more being enough to qualify any borrower for the best possible interest rate. Any score below 620 is considered bad credit.
How Lenders Classify Credit Scores
A lender uses the credit score to not only judge whether an individual should be approved for the loan, but also to decide what kind of interest rate would be warranted in order to secure the loaned funds. Individuals with bad credit pose a significant risk for lenders, because there is a much higher chance that the loan will be defaulted on and the lender may not recover their investment. Thus, by charging higher interest rates to borrowers with bad credit, lenders can eliminate some of the risk by recouping their investments sooner. Some lenders have specific limits at which they will deny an applicant. For example some lenders may not approve applicants with scores lower than 620.
Raising the Credit Score
Unfortunately, it is much harder to raise the credit score than it is to lower it. Debt can accumulate quickly and within a few months an individual can have a low credit score. However, it can take much longer to repair a credit score. Positive routine habits are the only way to raise a credit score substantially. It is important to keep a lot of the available credit line untouched as much as possible. Credit bureaus use a formula based on the debt-to-credit ratio to determine an individuals credit score. The best way to improve the debt-to-credit ratio is to maintain a low amount of debt and a high amount of available credit. Consistently combining this practice with timely payments and responsible spending habits will ensure a higher credit score for guaranteed loan approval.