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Monday, January 27, 2020

How Credit Scores and Ratings Affect Your Loan Application


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The first thing to know about a loan application is that it presents a level of risk to the bank or the financial institution that will receive such application, knowing very well that they might end up losing the money if the borrower does not pay the amount back. 

For this reason, such institutions thoroughly scrutinize every loan application in their effort to provide credit only to the most suitable borrower, one is trustworthy and capable enough to pay back the credit to be borrowed to them.

Credit scores and credit ratings

One way that financial institutions determine such capability is by the person’s credit score which quantifies the person’s level of “creditworthiness” or the chances that the person can repay their loans on time. 

The higher a person’s credit score, the greater the chances not only of receiving their requested credit but also of being eligible to be given a higher credit limit, whether for a loan or for a credit card. 

On the other hand, a lower credit score entails getting a lower credit than what is requested in the application, if not getting a declined application.

Determining a borrower’s credit score is not something financial institutions like licensed moneylenders do themselves. Instead, they rely on the help of the credit bureau, which serves as a database of borrowers’ information. 

While the credit bureau does not disclose the specifics of how it computes a borrower’s credit score, there are a number of factors that come into play:

 The amount of credit a borrower currently has
 The different credit vehicles the borrower has availed
 The payment terms including the length of payment given for a particular credit
 Credit payment history, which includes history of on-time payments and the amounts paid (if payments were less than the minimum payment required or not)

These factors are measured quantitatively by the credit bureau using a credit rating. The credit rating helps the credit bureau compute the borrower’s credit score that will determine whether they can get the credit being applied for. 

While a financial institution may have other criteria in approving loan applications, the credit rating and score provided by the credit bureau remains the most important factor they take into consideration.

Factors affecting credit scores and ratings

While the credit rating system may seem straightforward enough, this is complicated by the fact that there is more than one credit bureau in existence, and each credit bureau has its own credit rating system that they adhere to. 

This means that a borrower having certain credit score may be considered a “low-risk” borrower, which means he can avail certain credit, but another credit agency may consider the said score as a bit more “high-risk” of a borrower. 

More so, some financial institutions only rely on a single credit bureau for their information on their borrowers. This means if a credit bureau has a more stringent credit rating system in place, it might entail a slimmer chance for credit approval.

Credit ratings are also prone to errors such as wrong figures in the borrower’s outstanding amount or uncredited credit payments within the period generated in the report. Such mistakes can adversely affect a borrower’s credit scores, especially if one does not conduct due diligence on their credit information.

Fortunately, credit bureaus offer a free credit report at least once a year. It is advised especially for borrowers to take advantage of this offering to have a better idea of one’s financial health especially in terms of credit. 

This also provides an opportunity to dispute any mistakes in the credit report which may help improve the credit score as a result.

Credit “unscored” and “invisible”

Sometimes, credit bureaus may not provide a credit rating on a borrower who may have either very little credit information available (“unscored”) or have none at all (“invisible”), especially first time loan applicants. 

Without such credit information, these borrowers are deemed to be “high-risk” and would have difficulty applying for onlinecash loans in Philippines, though there are borrowers who are willing to make exceptions and help build the borrower’s credit history in the process.

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