When you take out a loan, you are typically required to sign a contract agreeing to make a specified number of payments of a specified amount by a particular date each month. Whilst you are said to have “good” credit when lenders believe that you will repay your debts on time, bad credit can indicate that you are not likely to pay your financial obligations within the agreed time. Here, we’re taking a closer look at what the “perfect” credit score is, and how loans could have an effect on its status.
What Is The “Perfect” Credit Score?
Identifying and reaching the perfect credit score is difficult, as there is no universal perfect credit score. Due to each lender and vendor having a different scoring system and a different idea of what perfect is, identifying this perfect credit score can be even more challenging.
While it is an annoyance for those of us in need of various services that rely on our score, a good credit score will depend on your previous debts, payments, and how many bank accounts or credit cards you have. Keeping on top of your bills and payments is paramount, and by doing so, your credit score is likely to improve.
There are multiple factors that can reflect negatively on your credit score such as repossession and defaults. Defaults will also remain on your credit report for six years from the date of the missed payment, which will ultimately effect lending decisions.
How Do Loans Affect My Credit Score?
A good credit report is essential for everyone, and while understanding what a credit report is can be difficult, it is paramount that you understand how you can improve your credit score to improve your chances of being accepted for certain financial services like a mortgage.
Even though some payday loan companies do not consider your credit history to be a finalizing factor in their approval decision where affordability is also a major component in the eligibility criteria, there are multiple other finance options that will reject your application on the basis of having a poor credit history.
Below, we’ll help you learn how you can achieve the perfect credit score and improve your credit report.
Eliminate Existing Debt
If you want to make a purchase that comes with a big price tag, you will likely need a loan to do so. By paying all of your bills on time as agreed under the terms of your contract with your chosen lender, you can improve your credit score. Banks and credit card companies may be hesitant if you are applying for a loan when you already have existing amounts of debt and being rejected could have an impact on your credit report.
An inquiry by lenders after you apply for credit is seen as a soft search, and while it may show up on your credit score, this is likely to have a lesser impact than a loan rejection. A number of inquiries in a short space of time could indicate that you are applying for lots of credit from various avenues and may also indicate rejection to some degree.
Keep Your Credit Card Under Control
Many confuse the fact that in order to have a good credit score, you must avoid a credit card. Although you must be careful with your spending, having a credit card might be an effective way to build up a good credit score, if you pay on time. To ensure your credit card remains in control, be sure to only use it when you know that you will be able to pay it off in good time.
Consider setting yourself a limit, for example, to not spend more than 10% of your agreed credit limit, in order to remain confident that you will be more likely to pay it off on time.
Think Long Term
One of the most effective ways to maintain a stable credit score is to think long term with your finances. This includes your credit cards and payments. A credit score will be based on your whole credit history, but the length of time certain financial products may impact your credit score is usually based on around 6 years either from the original registration date, or from when the debt was settled, depending on the type of finance you are borrowing.
When it comes to your credit score, it is important to not let your partner’s score put yours at risk. By being financially linked to someone, their files can be accessed as part of the process credit card companies operate to accept you. This means that if your partner has a poor credit report history, whether it is a result of missed payments, settled accounts or repossession, keeping your finances separate will help ensure you can sustain good credit.
If you have recent split from your partner and you have a joint account, financially delinking your accounts may stop their credit report history from affecting yours in the future.
To maintain a good credit score, you need to be responsible. This involves keeping up with what you owe, spending your money responsibly, researching online loans if needed, and understanding that while a “perfect” credit score can be onerous to obtain, it doesn’t mean that you will be turned away everywhere.
If you know that you are unlikely to be able to make the repayments on time on any form of credit, then you may want to consider an alternative option, such as borrowing from friends and family, as defaults can have a negative impact on your credit score.
Owners of accounts that fall into arrears are forced to pay additional charges on top of their monthly payments, of which can make repayment even more difficult for those who fail to be sensible.
It is no secret that loans can affect your credit score in a number of different ways, but by ensuring you pay back the money you owe in good time, maintaining a good credit score isn’t as difficult as you may believe it to be. From eliminating your existing debt, to keeping your credit card under control, you can improve your credit utilization ratio.