Why Your Credit Score is Important When Applying for a Loan

It is part of your credit score that ranks among the most important factors that lenders consider whenever you ask for credit, be it a small personal loan, a house, or even a new car. A credit score is a little more than just a number; it's essentially an indicator of your past financial behavior and how well you manage debt. Knowing the reason behind this number, which is so important, can help get the loan you need and make wiser decisions.

What's a credit score?

The credit score refers to a single number within your credit report that expresses creditworthiness. The detailed report of your borrowing and repayment history is regarded as your credit history. The higher the rating, the better your creditworthiness is, and your credit score is usually within the range of 300 and 850. The following elements are considered in the score calculation:

Payment history- 35%:

Your history of making timely loan and credit card debt payments, among other debt obligations.

30% of Credit Utilized:

The percentage in between your credit limits and existing credit card debt.

Length of credit history-15%:

The length of time you have had any amount of credit.

Credit account types-10%:

The mix of credit accounts you have, including mortgages, credit cards and installment loans.

Why Your Credit Score Matters

1. Loan Approval

Your credit score provides the basis upon which the lender will make a judgment of the risks involved in lending your money. The higher your credit score, the surer it is that you are a good borrower and that you will pay off your loan in due time. On the other hand, a low credit score would mean the opposite, higher risk, wherein your request may be denied. While a good score will raise your chances of getting loan approval considerably, a poor score will result in the process either being non-viable or too expensive due to high-interest rates.

2. Can Affect Rates

Even when you are approved for a loan, the interest rate that you will be offered is a factor of your credit score. Generally, the higher your credit score, the lower your interest rate. These lower interest rates can save tens of thousands over the life of the loan. For instance, on a 30-year mortgage, one percentage point of variance in interest rates will amount to thousands of money saved.

3. Loan Terms Affected

You could even be affected when it comes to loans in respect of the period in paying back the loan and the size of the deposit. In respect to this, lenders could grant better terms to borrowers with higher credit scores by offering them longer periods for payment with smaller down payments. On the other hand, when it comes to low-scoring borrowers, this may become strenuous, as the terms may involve shorter periods of payment with larger down payments.

4. Impacts Eligibility for Larger Loans

The larger the loan amount, such as a mortgage or car loan, the more reliant would be the lenders upon credit scores. A good credit score enhances your eligibility and provides you with better bargaining power for the loan. In cases of big loans, the creditors will look for a higher credit score to reduce their overall risk.