When you apply for a loan, be it a bad credit loan or any loan, the lender is going to review your credit history, and your credit score. The more you know and understand about your credit report and credit score, the better armed you are, and in a better position to be granted the loan.
Your credit report is made up of a few sections, one is details about yourself, name, address, date of birth, etc.
There also is a section that shows searches or enquiries on your credit, those that have viewed your credit report.
These also is a public records section that will show any bankruptcies or County Court Judgements/CCJ's.
And the report will have a credit rating for you and a credit score.
A credit score is a numerical value assigned to you and your credit report based on various factors. Different credit bureaus can use different factors in calculating a credit score, and they may also use different scoring methods.
A credit score is one thing a lender will use in consideration of granting a loan. The score represents a probability of you repaying a loan.
The higher your credit score, the better. If you have a low credit score, your odds of being granted a mainstream loan are low. Bad credit lenders look at credit scores, but may have a different scale or even a sliding scale of what they will accept in order to grant a loan.
There are a few components that make up what is used to determine your credit score.
Think of your credit score as a pie, a pie that is cut into various slices, not all the slices being equal.
Each slice of credit scoring pie carries a percentage or value with it that is what that slice contributes to your overall credit score.
There are two types of searches:
Hard Searches: Hard searches are enquiries that are placed on your credit report when a lender views your credit. Too many of these can lower your credit score.
Soft Searches: Soft searches are searches such as when you view your own credit report, or when you check for eligibility for a loan. These searches do not affect your credit score.
In reviewing our credit pie and the percentages assigned to each slice, you can see one thing that stands out is payment history at 35%. So one huge thing that can affect your credit score is how you repay accounts.
If you have arrears or have a habit of paying your accounts after the due date, it is going to have a huge impact on your credit score.
In addition, if you are close to your credit limits on any revolving accounts, such as credit cards, this, too, will also impact your credit score.
Also as mentioned before, having too many searches on your credit report will lower the score.
Let's look at how we can improve our credit scores.
Let's move on to Chapter 5 and managing your finances.