Building a strong credit history is something people always say when it comes to securing better loan options and more favourable interest rates. But how much do you really know about what credit is and the role it plays in borrowing money? Why do lenders rely on credit history to assess borrowers’ creditworthiness, and are there ways to improve credit scores?
In this article, we will discuss what credit is, exactly, and the importance of having a good credit score when it comes to obtaining loans. We will also go through several ways you can improve your current credit score or even lengthen your credit history to help you secure better loan repayment terms.
If you are wondering what kind of loan to choose in the first place, you can learn more with a loan comparison provider.
What is credit?
When people talk about your credit, they are referring to your ability to borrow money or access goods and services with the understanding that the repayment will be made in the future. In other words, it is an arrangement between a borrower and a lender, where the lender provides funds to the borrower based on the borrower’s promise to repay the debt in accordance with loan terms.
Credit is associated most often with financial transactions involving loans, credit cards, mortgages, and other forms of money borrowing. It is an extension of funds with the expectation that the borrower will repay the debt over time, usually with interest.
The importance of good credit in obtaining loans
Having good credit is vital when it comes to obtaining loans with favourable terms. Lenders use borrowers’ credit history to determine whether to approve a loan application, as one’s credit history demonstrates their level of financial responsibility.
Higher chance of obtaining loan approval
When someone has a good credit history, they are more likely to obtain a loan with good repayment terms, as the lender trusts them to be able to make repayments on time.
Lower interest rates
A good credit history may also result in lower interest rates incurred for the borrower. Lenders once again use credit scores to determine the level of risk they would be taking by lending their money. Borrowers with good credit are seen as low-risk, and they are likely to qualify for loans with lower interest rates.
More favourable loan terms and conditions
Borrowers with good credit may also be offered longer repayment periods, more flexible repayment options, and other benefits. On the flip side, those who have poor credit may be faced with stricter borrowing terms, shorter repayment periods, or higher collateral requirements.
Access to higher loan amounts
Good credit can also increase a person’s borrowing power. Lenders are more willing to lend larger sums of money to borrowers with good credit histories, as they have demonstrated responsible financial behaviour in the past.
Wider range of loan options
Finally, good credit opens up a variety of loan options from a broader range of lenders. These may include traditional banks, credit unions, and online lenders. With more options available, borrowers can compare loans easily and find the best fit for their financial needs.
How to build a strong credit history to secure better loan options
Having good credit and a strong credit history can open many doors when it comes to borrowing money, and therein lies its importance. If you do not currently have a strong credit score, there are ways to improve your situation.
Pay bills on time
The first and simplest thing is to consistently pay your bills on time. This includes credit card bills, existing loan instalments, and utility bills. It is one of the most critical factors in building a strong credit history, as missed or late payments can decrease your credit score. If it helps, you can set up automatic payment systems that can ensure you always pay your bills on time.
Limit credit card use and credit accounts
You should also limit credit card use and keep your credit utilisation ratio low if you wish to reduce your financial strain. Ideally, aim to use less than 30% of your total available credit, so that you can pay your credit card bills on time.
You should also avoid opening too many credit accounts within a short period, as each credit application triggers an inquiry on your credit report, which can lower your credit score – even if just temporarily.
Establish a mix of credit types
If you can, having a diverse mix of credit accounts, such as credit cards, instalment loans, and a mortgage can demonstrate your ability to handle different types of credit responsibly. However, you should ensure that you do not open new credit accounts for no purpose. You should always only take on credit that you can comfortably manage.
Lengthen credit history
A fact not many may know is that the length of your credit history matters. If you have a long and good history of being able to handle your finances responsibly, you are more likely to get an approval on a loan with preferable repayment options. You can lengthen your credit history by keeping old credit accounts open and active, even if you no longer use them regularly, as long as you are not incurring unnecessary charges in doing so.
Regularly check your credit report
Monitor your credit report regularly to make sure it is accurate, and so you can catch any errors or fraudulent activity early on. In Sweden, there are three major credit reporting agencies that offer check-ups for individuals. They are the UC (Upplysningscentralen), Creditsafe, and Bismode. UC is the largest and most used agency. If you are a borrower hoping to take out a loan in Sweden, you will be asked for a UC credit report to prove your financial circumstances.
Resolve past credit issues
Finally, you should resolve any existing, past credit issues such as delinquent accounts or outstanding debts. Work towards resolving them as soon as you can. You may also consider negotiating new terms with lenders or applying for loan refinancing if your credit score has improved since taking out your previous loans.
Final words
Credit is a vital part of loan borrowing. Having a good credit score and strong credit history can help you secure loans with better repayment terms, durations, and lower interest rates. However, building a strong credit history is a continuous process that requires consistent effort. Aim to practise responsible habits that can take you through your life for greater financial freedom in the long term.
Sharon Howe is a creative person with diverse talents. She writes engaging articles for WonderWorldSpace.com, where she works as a content writer. Writing allows Sharon to inform and captivate readers. Additionally, Sharon pursues music as a hobby, which allows her to showcase her artistic abilities in another creative area.