Improving Your Credit To Get A Loan
Presented by Loans Canada
It's common knowledge for those familiar with loan application processes that credit scores are heavily considered. The higher your score is, the more likely it is that you'll get approved for loans and achieve a lower interest rate. Fortunately, there are many things you can do to improve your credit score to be approved for a loan with lower interest rates.
Why Is Your Credit Score Important During The Loan Application Process?
Credit scores are so important during the loan application process because they are an effective way for lenders to gauge an applicant's financial risk. In other words, credit scores are used by lenders to determine the likelihood of the applicant paying back their debt.
Your credit score is calculated using the information found in your credit report. This information includes active accounts, accumulated debt, bankruptcies and judgments, inquiries, and repayment history. If you have excelled with your finances and handled debt responsibly, you will have a good credit score which lenders perceive as optimal for loans.
For more information about how your credit score is calculated, click here.
Although, it should be noted that credit scores do have limitations. A credit score is merely a number, it can't communicate every detail about an individual's spending habits or justify why someone has a certain credit score. Because of the limitations of credit scores, lenders do look at other factors like employment loan purpose.
How To Fix Your Score To Get Approved
Credit scores are never permanent, they can change for the better so long as the individual makes the appropriate effort to work on their finances and spending habits. There are many steps one can take to improve their credit score, meaning you won't have to wait too long for your credit score to increase before starting to apply for loans.
Get Up To Date With Payments
If you have an existing credit card, secured credit card, or line of credit with an outstanding balance, pay it off in full wherever you can. This will give your credit score a boost, lenders like to see that you don't have too much outstanding debt.
Another tip is not to cancel any credit cards or accounts despite paying them off. It's better for your credit score to not use the cards or accounts but keep them open. Of course, you can keep a few cards available for use for your daily needs.
Pay Down Existing Debt
If you have any outstanding debt, pay down what you can to make your credit report more appealing. Be strategic if you can't pay it all at once, make sure to pay off higher-interest debt before paying down other debt. Also, you can consolidate your debt in order to pay it off quicker or transfer high-interest credit card debt to a lower interest card.
For balances in collections, you can negotiate with lenders to accept a partial payment in exchange for reporting the debt as paid. Lenders would rather receive something instead of nothing and your credit score will benefit.
Keep Credit Utilization Rates Under 30%
Utilization rates are defined as the percentage of your credit cards that you're currently using. You can keep your utilization rates low, specifically under 30%, in two ways.
The first and most obvious way is to keep your credit card balance at or below 30% of the total credit limit. Instead of maxing out your credit card every month, use cash to pay your expenses. The second way is to increase your credit card limit without increasing your spending.
Analyze Your Credit Report For Errors
Errors in your credit report can be a reason why your credit score is lower than you'd like (check out the five most common credit report errors). Pull your credit report and check for errors, you are entitled to a free copy from both credit bureau each year. If you come across mistakes, dispute them with the credit bureau and ensure they're removed.
Once you've dealt with all your outstanding payments and debt, you still want to make timely, full payments moving forward to ensure your credit score is maintained. Setting up payment reminders for all your credit cards, loans, and other credit accounts will help you make consistent payments thereby preventing dips in your credit score. Another option is to set up automatic or pre-authorized payments.
What If I Don't Have A Credit History
Lenders want to see credit history because it is a reliable record of how you handled debt in the past. Without it, they may be skeptical about your capability to manage debt and deny your loan application. The good news is you have a clean slate to build your credit on, it will just take some time to be established.
Apply For Credit Cards
Credit cards are an easy way to build credit so long as you're responsible. Once you get a card, start using it and make sure to pay in full and on time each month. This will ensure that you’re building a credit history that is healthy.
Apply For Secured Credit Cards
Secured credit cards are slightly different from regular credit cards. They are secured by cash collateral, unlike regular credit cards that are not secured at all. However, much cash you give as collateral will be the limit of your secured credit card. As with any other credit card, be sure to make timely, full payments.
Authorized User Of Someone Else's Account
If you have family or friends with good credit, ask them to put you on their account as an authorized user. This will boost your credit score because each of their timely payments will be reflected on your report too, regardless of whether you’re involved with the account.
Be Patient And Consistent
Credit improvement is entirely possible, but it takes time which requires patience and consistency. It helps to be realistic too, any changes you make to your spending habits and finances should be manageable and doable in the long run.