What are all my loan applications doing to my credit score?
Applying for a loan can be a daunting and difficult process as there may be a lot of information and documentation required.
Each loan type has its own set of requirements. For example, a payday loan, which is a short term loan, will need much less information than a home loan.
It is important to take note of the fact that each time that you apply for a loan of any type there is a record made of your application and the information that you have supplied. This information is kept if you are successful or rejected. These applications and all of the loans currently active will have an impact on your credit score.
What are my credit score and credit record?
When you apply for any form of credit from a home loan to a store card you supply the lender with your information including your ID number. Each time you apply for a loan, are rejected or accepted and each time you make a payment or default on a payment a record is kept of your action and linked to your ID number. All this information together forms your credit record and stays with you throughout your life.
From all the information in your credit record or history, a credit score is allocated to you.
A credit score is a number between 300–850 that depicts a consumer’s creditworthiness. The higher the score, the better a borrower looks to potential lenders. When accounts are handled responsibly and you pay your instalments on time and don’t miss any payments you get positively impact your credit score.
What the different scores mean:
- A low score is generally considered to be between 300 and 579
- A fair score is between 580 and 669
- A good score is anything above 700
When applying for a new loan the lender will be able to run a credit check and they will have access to the information regarding your applications, outstanding debts and loans as well as your payment history on these outstanding amounts. When it comes to your credit score ratings, there are ways that it can be improved and there are ways that you might impact it negatively.
What then will impact my credit score?
Your actions can either negatively or positively affect your credit score.
First, it is important to note that persons with a credit history are more likely to qualify for more credit so it is a good idea to get either a store card or a credit card with a very low credit limit and manage these forms of credit responsibly by using them sparingly and always paying them on time and even paying more than the required minimum to build a good credit history and thereby have a good credit score when you need it, for example, for vehicle finance or a home loan.
If you have ever missed a payment, paid late or short paid on numerous occasions, you have very likely been impacting your credit score negatively. Defaulting on an account will leave a blemish on your record at the credit bureau.
Paying all of your debts on time and making sure that you never miss a payment will positively impact your credit score. Make sure that you always receive all of your statements so that you can check what you need to pay to each lender. Be responsible with your credit and only use it when you need it and you know you will be able to pay it back within your monthly budget.
Why do potential lenders look at my credit score?
Banks and lenders want to know that you are able to repay on time and with the agreed amount regularly for the agreed-upon term of the loan. You have to prove your creditworthiness to them. They will also assess all the loans and credit that you are currently paying back to make sure that you still have enough disposable income to pay back the loan that you are applying for.
While you have been proving that you are a good payer, you have also been building up a clean credit report. As soon as you’ve secured your large loan you can go ahead and close your store accounts or credit card if you do not feel comfortable having these small forms of credit. In the future, your large home loan or car loan will form the basis for your credit score.
What are all my loan applications doing to my credit score?
Each time you apply for a loan, be it a quick loan, personal loan or short-term loan, the lender will access your credit score to check if you are a good payer and to make sure your credit score is high enough to qualify for the loan you are applying for. Each time this happens a record is made of this and the potential lender can see this. If you have been rejected multiple times already then this decreases your chances of being approved for the current loan you are applying for.
You should be very careful about applying for multiple loans all at once or again and again as this will negatively affect you.
What can I do to prevent this?
Did you know that you can apply to see your credit record once a calendar year? Before applying for a loan this is an important step to take as you must check for any mistakes or fraud that is negatively affecting you. Have these issues sorted out as soon as possible so that when the lender does access your information it is accurate and positive in your favour?
When you apply for your loan make sure that you do all of your research before you hit the apply button as your loan application may be rejected due to missing documentation and not because of your credit history but it will still show up on your profile as a rejection which will show you in a negative light.
Make certain that you know exactly how much money you need to apply for and what type of loan you need. You should also have a comprehensive checklist of all documentation and information required by the lender so that you do not miss anything. This will also help speed up your loan approval.
Limit the number of lenders you apply to. Make sure you choose carefully after doing comprehensive research on the benefits and interest rates of each option so that you are limiting the number of applications.