The preponderance of athree-digit score calculated based on information on your credit report is indubitably irrefutable. A good credit rating enables you to qualify for lower interest rates while a bad credit history attracts high interest rates.
There are three credit reference agencies that maintain the record of your credits, and they all use a different formula to calculate your credit score. Financial experts suggest having a good credit history. The higher the number, the better it is.
However, they also recommend not worrying too much about your credit rating. It is because it is just a number that varies by credit bureau, and it is not a real number to insinuate your true financial condition.
Of course, there is a reason to worry about your score if it is constantly plummeting because online loans for bad credit are quite exorbitant, but there is no point in the pursuit of an excellent credit score.
Why you should not worry too much about your credit rating
It is vital to maintain a good credit score but to be overly obsessed with an excellent credit rating is not acceptable. Here are the reasons why being too worried about your credit rating is never suggested and appreciated:
1. Your credit score is a rough number
Credit scores determined by credit reference agencies are simply a representation of how much a lender would feel inclined to lend you money. Lenders do not employ the credit rating given in your credit report. They rather utilize their own formula to calculate your credit score. The scoring model varies by lender, so there is no point in pursuing an excellent credit rating.
Lenders particularly determine the lending risk. The higher the risk of default, the lower the chances of obtaining money will be.
Lenders peruse your credit report to collect information such as past payment behaviour, the types of credits you have applied for, how much amount you owe and the like. Based on such information, they determine whether they should lend you money or not. The chances of approval are high when the risk of default is quite low.
2. Creditworthiness is only part of the affordability test
Your credit report is perused to determine your past payment behaviour. It highlights how well you managed your debts in the past. However, your credit score cannot reveal your future ability to repay the debt. Therefore, lenders run an affordability check. Your credit report could reveal your creditworthiness, but it cannot disclose your financial information. How much you earn is the most important factor that lenders pay attention to while determining whether or not to sign off on your loan.
It is likely that you receive rejection from your lender despite a good credit rating if you do not have enough income to repay the debt. Even if you are taking out easy online loans, they cannot be approved without a thorough check of your income sources. You must have sufficient income to repay the debt.
If any lender finds that the money you are borrowing cannot be discharged on time due to a lack of income sources, they will turn you down. Lenders employ credit information mentioned on your credit report and income sources to determine your affordability. Your repaying capacity is a better indication than a credit score of your repaying capability. Most people struggle with debt settlement only because they do not have sufficient cash to pay off the debt on time.
3. Each lender scores differently
When you apply for a loan, each lender uses their own methods to assess your affordability. They have their own scoring model that they utilise to determine your affordability.
There is a strong likelihood that your score is determined poor even if your credit rating is perfect, according to credit reference agencies. Lenders do not pay heed to the score credit reference agencies determine. They completely rely on their scoring model to ensure that they do not lend money to a risky borrower.
Of course, when the risk is high, a high interest rate will be charged. Most of the time, the high risk is due to lower income in proportion to the debt you owe.
Small emergency loans are paid off in fell one swoop, so it becomes more necessary to have sufficient income. However, even if you are to pay down the debt in fixed instalments over a period of months, you must ensure that you have a backup plan despite the fluctuation in your current income sources.
4. You should improve your overall credit picture
There is no doubt that a lender would evaluate your overall profile. For instance, if you have multiple cards and you carry the balance every month, this will badly affect your credit score. It is likely that you pay off the balance on time, but despite that, a high credit utilisation ratio at the time of applying for a loan will call your credibility into question.
Some people feel worried when they close their credit cards thinking that it increases their credit utilisation ratio. Do not forget that having balance on multiple cards is also a negative sign. According to the lender’s scoring model, your credit score might be poor. Further, you do not need to worry about closing your accounts when you do not have to apply for a loan immediately.
The bottom line
It is vital to keep your credit rating in good condition, but at the same time, you should focus on improving your overall credit picture. You do not have to be overly worried about the credit rating that credit reference agencies calculate because lenders use their own methods to determine the risk in lending you money.
Caleb works as a senior content writer at Financealoan for the past 3 years. He is a writing enthusiast and invests a good time in exploring and writing about financial trends. His keenness in exploring a topic to create a research-based piece is simply unmatched. He believes in including a texture of authenticity with real-time examples and facts.
Caleb’s blogs and articles reveal deep-seated knowledge and expertise. His educational qualification forms the base of his excellent command over the industry and Jargon. He is a postgraduate in Finance and is currently involved in exploring the world of the stock market.
