It has taken lenders an interminably long time to ease their restrictions on lending, but at long last, it is getting somewhat easier to get approved for a loan. The best interest rates have dropped from 7.5% to 3.4% in the last two years, which indicates that the banks are feeling the need to compete for customers again, rather than the other way around. The sticking point is that these discounted rates are only available to lenders whose credit scores fall within the upper half of all loan applicants. A full 90% of applicants find themselves either turned down outright or offered loans at significantly higher interest rates.
So before you begin popping your Christmas crackers early in celebration, you might want to consider checking your credit reports and, if necessary, doing a bit of house cleaning before marching off to the bank to get that long-awaited loan. Those reports, which allegedly detail how responsibly and reliably you have met your prior credit agreements, are available from Experian and Equifax.
What do you mean, “allegedly”?
Both credit scoring companies do an exemplary job of keeping track of millions of people’s credit histories, but there is always the chance that a given report can be less than 100% accurate. Not all creditors are as meticulous as they could be about updating the reports they provide, and some are less than timely in reporting changes to the scoring companies.
In addition, instances of identity theft that damage a person’s credit score often go unnoticed by the customer until they find themselves rejected when applying for a loan or credit card, or even when applying for a job or trying to open a new mobile phone account.
Between these instances and the inevitability of the odd human error when updating an account, it falls to the would-be borrower to ensure that his or her score is accurate, and that it has not fallen victim to plundering by means of identity theft or other fraud. If, upon checking your credit reports, you find incorrect information or evidence of fraud, you need to act quickly to address the problems with the listed creditors to get them corrected. Im the case of fraud or identity theft, you will need to make certain that the authorities have been alerted, as well.
What to look out for beyond errors on the report or cases of fraud
Take it easy when applying for credit – Whatever you do, avoid applying for too many credit cards, loans, or other credit applications in a short period of time. Each application you submit to a prospective creditor is likely to result in them running a “hard search” on your credit history, and each of these searches is itself added to your credit report. If a prospective creditor sees many of these searches, especially over a relatively short period of time, they are likely to reason that you are either desperate for credit or on the path to overextending your finances, and they are just as likely to deny your application for that reason.
Don’t miss any payments – This should go without saying, but unfortunately, it does bear repeating. You add to your credit history with each passing month. While a good report on a debt might not appear until the debt is paid off, missing or being late on payments are reported in real time. While missing or being late on a single payment might not disqualify you for a loan all by itself, it never helps, and a pattern of missed or late payments marks you as a credit risk.
Don’t max out your available credit and apply for more – If your credit card balances stay at or near your approved limit, lenders will usually assume that you are not very good at managing your finances. Keep the outstanding balances as low as possible.
Don’t summarily close out accounts you aren’t using – You would think that paying off an account and closing it would make you a saint in the eyes of prospective creditors, but you would be wrong in thinking so. You are actually better off keeping those accounts open, so long as you don’t incur exorbitant fees for doing so. Using the cards or accounts from time to time and keeping up with payments establishes the very kind of credit pattern that most lenders want to see.
Establish your stability as a customer – Nobody enjoys moving, and people who change their address too frequently are looked upon by creditors as being something less than stable, and inherently poor credit risks.
Maintain a positive balance in your chequing and savings accounts – While the occasional overdraft won’t necessarily disqualify you for a loan, frequently having a negative balance in your accounts is not a good sign of good money management. Ideally, you will want to have enough cash on hand to cover at least one month’s expenses if you want to impress lenders.
Shop wisely for credit – Being accepted for credit by an institution that is well-known for accepting high-risk borrowers won’t be much of a plus on your credit report. Compare the terms you can get from different lenders, and apply first to those who offer the best interest rates and terms, and for whom you are most likely to qualify.
Being circumspect in when, why, and to whom you apply for credit can help you establish yourself as a savvy and reliable borrower, the kind that creditors welcome with open arms. By ensuring that your past creditors and the scoring agencies are doing their part, and by doing your part to maintain a good credit rating, you will not only find it easier to get credit, the credit you get will also end up costing you far less, in interest rates and fees.