The main reason why most individuals who are looking to borrow money from banks get high-interest rates and disadvantageous terms and conditions is the fact that they have a low credit rating. This can be either due to a very short history in terms of using banks’ services or as a result of not repaying loans on time. Unfortunately, most people come to the conclusion that their credit score is too low for a particular type of loan only after they apply for it.
Building up your credit rating takes time due to the fact that it is the result of a complex algorithm composed of factors that describe your financial behaviour. However, most lenders do not look at the whole credit rating equation. In most cases, they will only look at three components when establishing what interest rate, terms and conditions you should get on a loan. Here what you need to keep in mind when it comes to your credit rating:
- Pay Attention to Your Credit Utilisation Ratio
Your credit utilisation ratio is one of the first things that lenders will look at when deciding if you are eligible or not for a loan. This ratio is calculated by looking at the amount of money that you are using from what you have access to through your credit card. For example, if you have a £5,000 limit on your credit card and have used it to purchase furniture worth £2,500, then you will have used 50% of your available credit. In most cases, if this ratio is over 30%, then lenders may draw the conclusion that you are unable to properly manage your income and may offer harsher terms and conditions for their loans.
- Do Your Best to Always Make All Payments On Time
The single most important element of your credit rating is your reputation. Individuals who are always late with their monthly payments on their loans, regardless if they are repaying a personal loan or a mortgage, maybe offered higher interest rates than normal. Please keep in mind that those who have missed several consecutive payments or have taken out a secured loan and have ended up losing their collateral to the bank may be refused their request to take out a loan altogether.
If you are ever unable to make a monthly payment or the cost of a loan becomes too great to handle, go to the lender and explain the situation. In most cases, the banks will agree to work with you in either to make it easier to repay the money. This can be done either by refinancing the loan or through debt consolidation.
- Do Not Send Too Nany Applications in a Short Amount of Time
Every loan request that you send out to a lender is usually attached to your financial history. Sending a larger number of loan applications in a short amount of time (a practice that is usually meant to give individuals information of how large the monthly repayments would be) will have a negative impact on your credit rating. Lenders will usually presume that the reason behind a large number of applications is your insecurity when it comes to handling your personal finances.
Banks generally look at how you handle your finances and at how you’ve repaid your pas loans. In other words, use your credit cards sparingly, make your monthly repayments on time and, whenever possible, use online loan calculators to determine how much you would have to pay for a particular loan, rather than getting the information through a loan application.