How credit scores impact loan applications

Waiting for a loan to be approved can be stressful and it’s not uncommon for a person to worry over potential rejection or wonder if they are making the right choice by applying for the loan in the first place. One thing that consumers can be certain of, is that a good credit rating is a prerequisite for qualifying for any loan.

Did you know?

Did you know that your credit rating, and all the information on your credit report, are key components used to determine whether you will be approved for a loan or not? And if you are approved, your score can also affect how much you qualify for and the rate you will pay.

To ease your mind and to reduce those stress levels, making your credit record look more attractive to loan providers before you apply for a loan could be to your benefit. In this article, we will discuss what a credit score is, how a score is determined, and how one can improve their score so that it’s agreeable enough to impress any credit provider.

In This Guide:

What is a credit score?

Banks, creditors, and finance companies collect a variety of information to compile a credit report for each individual. Each report includes an individual’s borrowing and repayment history. This report is then used to determine a figure or credit rating. This rating affects whether your loan application will be approved and on what terms.

As defined by Michael Bowren, the CEO and Director at Fincheck –

A credit score is a 3-digit figure that’s calculated in accordance with the data provided on your credit report. Your score gives potential creditors an indication of how efficiently you manage your repayments. This, in turn, is used to determine if you meet the standards required to qualify for a loan, a credit card or a basic in-store account.

How is a credit score determined?

As we mentioned, a credit score is reached using information that has been stored on your credit record. The information you share on your loan application form can also sometimes determine the rating that you receive.

Essentially, the main factors that make up a credit score include:

  • Your payment history. Have you been paying your debts on time all the time?
  • How much debt you are in at the time of handing in your application.
  • The length of your credit history. Many go through life without having any credit history at all!
  • The type of credit you have taken out in the past i.e. have you taken credit out in different categories such as store accounts, bonds, and credit cards, etc?

Who uses credit scores?

Most creditors, lenders, and financers work out loan terms by referring to the applicant’s credit score. So, whether you are looking to take a mortgage out for a home, finance your vehicle, or you simply want to take out a small amount of credit at a store - a good credit rating is always required.

What constitutes as a good credit rating in south africa?

In South Africa, the figures for credit scores will vary between 330-850. If your rating is 750+, then you have an excellent score. Anything above 680 is usually deemed good enough, however, and it’s only if you fall below this bracket that your loan will be rejected or you will be offered a loan but with exceedingly high interest rates.

Keep in mind - 

The definition of what a good credit rating is can change over time and rating criteria can also change between institutions. The above can be used as a sufficient guideline, however, and if you would like more information, you can ask the lender you have approached to explain the score that they have allocated to you.

How a poor credit rating can disqualify you from receiving a loan

If your credit score is poor, it could mean that:

  • You will be charged a higher interest rate.

  • Your credit limit will be smaller than you had hoped.

  • Your loan will not be approved at all.

When a credit score is very low, then creditors will view the applicant as a risk. They might fear that they will not pay the loan instalments on time (or at all) and they will be wary of loaning larger sums of money. Some are happy to compensate for this risk by simply increasing the individual’s interest rate while other institutions prefer to not take the gamble if the odds are not in their favour.

How you can build and maintain a good credit score

Building and maintaining a good credit record and score has become an essential component of life in general. The aim is not to eliminate or avoid debt but to manage it well. You can do this by:

  • Creating a monthly budget and then sticking to it.
  • Paying all of your bills on time, every time.
  • Avoiding taking out more credit than you can comfortably pay off.
  • Paying more than just the minimum monthly balance on outstanding debts.
  • Closing any unnecessary accounts (loans are good but they need to be kept minimal and manageable).
  • Setting financial goals and then working hard to attain them.

When it comes to a credit score, only you can determine which bracket your very own rating will fall in. The more responsible you are with your money, the more likely you will qualify for the loan you had hoped for. Also, if you feel like the score you have been given is not accurate or fair, then remember that the National Credit Act in South Africa is accommodating when it comes to accessing and challenging misinformation held by a credit bureau at any time.

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