It is the axiom that a stellar credit score improves your chances of qualifying for a loan. Oblivious to risk assessment methods lenders use, borrowers assume a credit rating is the cardinal factor to decide interest rates they will be charged. Undoubtedly, your credit score must be up to scratch as it speaks volumes about your past payment comportment. Lenders would certainly want to examine whether you paid all your debts on time in the past. Commitment is paramount. Unfortunately, it is not the foremost factor because lenders focus on a combination of factors to determine risk involved in lending you money.
If your credit score is not up to snuff, you are advised to improve it. Start with checking your credit report for errors. Chances are you have been the victim of identity theft. You will have to dispute errors and unidentified accounts that you never requested to open. Pay your bills on time, so your credit score becomes better over time. Be careful with borrowing money. Too much debt increases the chances of falling behind on payments and worsening your credit score. But if you think that is more than enough, you are all wet.
A high credit score does not automatically guarantee a loan. Your credit score only reflects your past payment behaviour. It does not reveal information about your current repaying capacity. Lenders would want to know whether you will be able to settle up your debt or not. Therefore, income is also an important factor.
At the time of processing your loan application, lenders would scrutinise your income. The purpose of evaluating your budget is to know if you have wiggle room to bear additional burden of the debt. No lender would feel inclined to approbate your application if they find that debt payments mean struggle with regular expenses.
Most borrowers take out cash advance loans, for example, and eventually figure out that they have borrowed more than their repaying capacity. A registered and responsible lender is supposed to ensure that you will not struggle to keep up with payments. Otherwise, it could attract a complaint against them.
Another important factor lenders would carefully evaluate is how much debt you owe. A debt-to-income ratio never affects your credit rating as it is not recorded on your credit report. Yet, it is crucial because debt obligations could affect your repaying capacity. When lenders assess your income sources, they carefully evaluate your expenses against your income. Even though you are easily managing all payments, there are chances of struggling with payments after taking out a new debt.
A high debt-to-income ratio is an important factor for many lenders because there is no guarantee about your current income sources. Chances are you lose your job. You will more likely be in the red if you get in a tight spot. Many borrowers struggle to prove their repaying capacity despite fluctuations in their income sources.
For instance, if you apply for the cheapest personal loan in Ireland, you must have a backup plan if your financial situation becomes weak. This improves your chances of receiving approval from your lender. A golden rule of thumb says that the debt-to-income ratio should be less than 30%.
You might think that your lender will sign off on your application easily if your income is great and your credit rating is good, but it might not be the case all the time. Your employment history is also taken into account. If you have been switching between jobs, your chances of getting approval from your lender are very slim. This is because lenders would not be able to be certain about your repaying capacity.
Your employment history must be static. It is not a bad idea to switch a job, but make sure that you have been in your current employment for at least 12 to 18 months. Constant switching between jobs indicate that you are eased out of the company. if you again lose your job, you might end up being unemployed for a long period of time. Of course, you will struggle to clear your dues if that situation arises.
First off, you should keep in mind that application repudiation despite a stellar credit history does indicate any fault on your part. It is quite a normal part of the application process. Lenders use their own methods to determine your repaying capacity. The credit score you see in your credit report is only for your reference, and it is calculated based on the rough model. Further, this calculation does not take into account your debt-to-income ratio.
However, when lenders determine the risk involved in lending you money, they consider the debt you take on against your income. If the debt-to-income ratio is high, it will reduce your credit rating. the score your lenders calculate may differ from the one credit reference agencies calculate for you.
It is likely that your credit score by Experian, for instance, is good, but it is a fair rating when lenders calculate it using their own model. Lenders do not consider the score that credit reference agencies calculate. They make the decision of approval based on their scoring model. If they find that your score is low, you will be charged high interest rates. Sometimes, your credit rating may be too bad that results in straightaway rejection of your application.
So, when you are refused a loan despite a good credit score, you should contact the lender and ask what led them to this decision. Though lenders are not bound to explicitly reveal the cause, they might give a hint. Once you know why your application was rejected, you should work upon ways to fix it.
When it comes to improving your chances of being approved for a loan, you should focus on making your overall credit profile, not just your credit score. In addition to your credit rating, you should focus on your income sources. Make sure that you have enough money to repay your debt along with other expenses. Even if your financial condition is turned upside down, you should be able to discharge your debt on time. Do not forget to keep your debt-to-income ratio very low.
This ratio does not affect your credit rating as it is not recorded on your credit report, but this plays a crucial role to determine how much risky borrower you are. You should always try to keep this ratio less than 30%. The lower, the better.
Your credit score is not the foremost factor to decide whether you will be able to obtain approval from a lender. You should also focus on other factors such as your income sources, debt-to-income ratio, and employment status.
