While everyone will be aware of the concept of credit scores, there is some confusion and misinformation regarding the benefits of a good credit score. Christchurch loans agencies, such as QuickLoans, appreciate that not everything is straightforward, and there can be some challenges. Before we look at the benefits of a good credit score, it is essential to understand what your credit score shows.
What is the purpose of a credit score?
There is a general misconception that a credit score is simply a means of tracking your financial history. Your historical financial information is used to arrive at your credit score, but this is not the primary purpose. The main goal of a credit score is to predict the likelihood that a lender will receive full repayment of any personal loan or credit card in the future. So, yes, your credit history is essential, but it is used to predict a lender’s risk/reward ratio.
While your credit score is just one of many factors used when applying for finance, it is undoubtedly one of the more important. Therefore, you must monitor your credit score and make all repayments on time.
Building your credit score
Whether you are applying for a loan in Christchurch, a loan in the UK, America or anywhere else, you must have a credit score before the application. Consequently, the earlier you can start your credit history, the better. The majority of people will be eligible for different types of finance when they turn 18, but they can open a savings account before that. This starts their credit history and allows credit rating agencies to calculate a credit score.
Many people are unaware that not having a credit history can be as damaging to your credit score as having a chequered one. If there is no information to calculate the risk/reward ratio, it won’t be easy to secure finance.
There is a general misunderstanding concerning chequered credit histories. Just because you have had difficulties in the past does not mean this will be held against you indefinitely. Recent financial transactions will be given more weight, and eventually, historical issues will be ignored. Your credit score calculation will not include traditional financial transactions from more than seven years ago. However, a bankruptcy note can remain on your file for up to 10 years and impact your credit score.
How credit score helps Christchurch loans customers
Unfortunately, many people view their credit history and credit score as a hindrance rather than a benefit. As a resident looking for Christchurch loans lenders, it is vital to appreciate your credit score will be one of the main factors lenders consider when looking at any finance application. As this information is data-driven, there is no bias, no human influence, and consequently, everybody is treated the same.
If your credit score is high, you will generally be eligible for higher levels of finance and lower interest rates. On the flip side, if your credit score is relatively low, this could cause problems, although there may be mitigating circumstances. As a credit score is a widely used and respected measure of an individual’s reliability, it is used by all lenders. Consequently, this is how many online lenders can review your application in minutes and make a prompt decision!
The main benefits of a good credit score
There are many ways to benefit from a good credit score, most of which revolve around the approval of finance. Some of the more recognised benefits include:-
Faster loan approval
As you will notice with Christchurch loans lenders, many loan approvals are completed in just minutes. While lenders will still require all relevant identification documentation, this is a very positive factor if your credit score is higher than their minimum requirements. It indicates that the risk/reward ratio is acceptable to their business model and recognises you as a potential customer.
Many of us appreciate only too well that finances can change relatively quickly; therefore, prompt access to loans, credit cards, and other such arrangements can be crucial.
Decisions are not biased
When considering any finance application, the risk/reward ratio is the main factor for lenders. This is based mainly on your credit score. Due to this measure’s respected nature, most of the decision-making process is based on cold hard data. There will be occasions where an application may be borderline, requiring a degree of human input, but the majority involve simple calculations.
This brings us to a fundamental issue, potential bias. Some lenders may have used stereotypes when considering loan applications in years gone by. The situation today is very different. There is nothing personal about the consideration of your loan application. Consequently, issues such as gender, religion or social status will have no bearing on the outcome. There are three main benefits to this data-driven approach:-
• More people are eligible to apply for finance
• Increased competition amongst lenders is good for consumers
• Due to the broader market, this has improved liquidity
The now unbiased approach to loan applications seems only to benefit consumers at face value. However, on further investigation, there are benefits to lenders with a potentially broader market and enhanced levels of business. Could this be described as a win-win for all parties?
Poor credit performance in the past counts for less
As we touched on above, the algorithm used by all credit rating agencies places more emphasis on recent transactions. While it would be foolish not to consider historical issues, they are unlikely to be a factor after seven years when calculating your credit score. Consequently, the older the financial transaction (positive or negative), the less impact this will have on your current score.
The system itself relies on all New Zealand finance-related companies to make the credit rating agencies aware of issues (positive as well as negative) with individuals. This central database, used to calculate your credit score, is accessible by any party. Of course, there are data protection issues to consider, but both positive and negative points will be noted on your file. So, there is life after a troubled financial history, and the sooner you start repairing your credit rating, the better.
Lenders can offer enhanced loan availability
As straightforward loan applications are automated, using your credit score increases the capacity of lenders, in theory making more loans available. This, in turn, increases competition and has seen many businesses switch to relatively niche market areas. So, in theory, increased general and niche capacity should lead to better deals for consumers. In addition, if you were deemed not eligible for a particular type of loan, there may be other alternatives available.
Historically, there would have been significant paperwork and third-party information used in the loan review process. This took time, money, and effort, but it could also lead to human errors, which were devastating for some applicants. So, while many automated processes we see today are not looked on favourably by consumers, it has benefited many in the Christchurch loans lenders market.
In general, interest rates decrease
As most Christchurch loans lenders use your credit score to try and predict your future financial behaviour, a good score is hugely beneficial. Again, as mentioned above, the risk/reward ratio is the foundation for any financial transaction. This allows lenders to be as competitive as possible on interest rates, depending on your credit score. Since the finance application process is almost entirely automated, potential cost savings can also be passed on to consumers. Even more competitive interest rates!
All of these improvements in the modern-day loan approval system have created a leaner and more flexible financial sector.
Other areas where a good credit score can be beneficial
While we have covered the five main benefits of a good credit score, there are also other factors to consider. A good credit score can help:-
• Negotiate improved finance terms
• When applying for consumer credit
• Obtain higher loan/credit card limits
• When applying for certain jobs
Even though there are other factors to take into consideration, your credit score is one of the most important.
Do you want to know how to improve your credit score?
We all must monitor our credit scores regularly. This will help avoid human error, create opportunities to repair and improve our scores, and combat fraudulent activity. Even though significant protections are available for consumers and businesses, we need to play our part.
Check out these 8 ways to improve your credit score and give yourself the best chance of securing finance.
There are many myths and misunderstandings regarding credit scores, the way they are calculated and which financial activities will impact them. As they are central to any finance application and many other areas of everyday life, it is vital to maintain good standing. We all experience financial challenges from time to time. They can sometimes impact our credit history and our credit score. But, this is not the end of the world!
It is essential to make repayments on time and ensure that you don’t spend above your credit limit. However, even in the darkest of hours, your focus should still be on repairing and improving your credit score. This will ultimately give you the best chance of tackling your financial challenges, placing your finances on a sounder footing and ultimately reducing what can be debilitating financial stress.