You know you need good credit, but do you know why it matters? Your credit history shows potential lenders how you have handled debt in the past, and how much debt you are currently carrying.
Potential lenders will take your credit history into account when you apply for a car loan, a mortgage or a personal loan because it provides clues about your ability and commitment to paying back the loans.
Would you qualify for a loan?
Before they approve a loan, credit card or mortgage, banks consider the following criteria:
- Character alludes to a person who is financially serious and stable. It also considers the length of time you have been in your current job and address. These factors give confidence to the lender.
- Capital is the cash you have in your savings account and properties, such as a house, car or investments. If a bank gives you a guaranteed loan and you do not pay it back, the lender could use your properties as collateral or warrantees to repay the loan. When you use a credit card to buy merchandise, the lender is giving you a non-guaranteed loan.
- Capacity determines if you have enough discretionary income to repay the debt. Having a regular job with a stable income is essential when applying for credit. Keep in mind that the lender will evaluate your whole financial scenario, by evaluating your income and debt to determine if you have the capacity to repay.
- Collateral refers to the asset(s) the bank uses to secure the credit. Examples of this are a home is the collateral for a mortgage, or your car is the collateral for an auto loan.
- Credit is what you have built if you already have a credit card or any other type of loan. In that case, the lender will take into account your payment history and the amount you still owe.
Why loans are denied
Although there are many loan products out there, there is still a chance you will not get credit approval from a bank. There are a few reasons you might be denied a loan:
- Not having a regular job.
- Insufficient income to repay the loan.
- Affected credit history (late payments or not paying off previous loans).
- Not enough time in your current address.
- Low down payment.
If you have been denied a loan, you can take steps to repair your credit or establish credit if you need to.
Establishing good credit
Your credit management style is part of your financial life. The way you manage – or mismanage – your credit will affect your future. It’s something to think about next time you’re tempted to use your credit card on an impulse buy. Using your card is the same thing as taking a loan. You will have to pay it later – with interest.
You can start to establish a good credit history by applying for credit according to your needs; don’t borrow too much. If you do not have a credit history, you have two options:
- Guarantee the loan with a savings account, a certificate of deposit (CD) or a house.
- Find a person with a good credit history who can act as your guarantor.
Taking steps to build or maintain good credit is vital to getting the things you want, whether it is a house, a car, a college education or peace of mind.