Your credit score is basically your creditworthiness from the perspective of banks and other lenders. Your credit history is a record of all financial transactions that have been reported to the bureaus. Usually, all loans get reported to the credit bureaus but some other transactions are also recorded. Anyone who has never defaulted on any loan will have an excellent credit score. Your credit score will not be great if you have never taken a loan. Contrary to what some may believe, those who do not need financial assistance from banks or other lenders do not naturally become creditworthy. There has to be a history of responsible borrowing and timely repayment for credit to improve.
- The first fact you should know is that your credit score determines if you are eligible for a loan and if so then for how much. Your income will ultimately determine the loan amount you can be approved for but the credit score will have an initial influence. Your income and credit score, both should be sufficient for a particular loan amount. This is true for all types of secured loans, from mortgage to car loan, business to personal loan.
- Credit score should not matter when you are applying for unsecured loans. Private lenders do not rely on credit score to assess the profile of a borrower or their affordability. However, this does not mean private lenders do not refer to the credit score or conduct a credit check. Many private lenders will conduct a credit check and this may or may not influence the approval. In some cases, a credit check is carried out and it influences the terms of a loan, if not the approval. Any lender has the right to conduct a credit check. It is not for the borrower to decide. What a borrower can decide is if one should deal with a lender that does not use credit score to determine eligibility or subsequent approval.
- Credit score gets reviewed as and when new financial data gets reported. If you complete the repayment of a loan in a timely manner, your credit score will improve. If you do not, then your credit score will suffer. However, this change is not abrupt. Credit score gets reviewed once a year. Any major financial update that can affect your credit score will only show up when the report is generated. So in a specific moment, there may be a positive or negative entry in your credit report but the overall score might not reflect that.
- Credit score cannot be improved dramatically in a short span of time. It can plummet in case of a serious financial anomaly. Those who file for bankruptcy will have their credit score plummet. Those continuing timely repayments will witness a steady improvement of the score. If you have a poor credit score, not borrowing is not the right way to repair it. You must borrow and repay on time to improve it. But you must avoid excessive and frequent borrowing.