Getting Your First Loan and Building a Credit Score
As we move through life there are a few “milestones” or landmarks that many of us will remember, things such as graduating school, our first real job, and also things marking getting older. Being in a long-term relationship, having children, buying property, even buying our first car.
Many of these “firsts” involve a purchase, such as buying a car or a property. Which can lead to the need and use of credit; getting a loan.
Getting the first loan you ever have and beginning to understand the process of getting a loan, and also understanding the process of what credit is, how credit works, and also what can seem as a complex process of credit scoring, at first may seem a bit daunting.
But it doesn’t need to be.
Lending money, borrowing and banks, has been around since the dawn of time. As soon as there became a need for people to need access to a larger amount of money then they could save for, the need to borrow or get a loan was created.
The process of getting a loan has changed over the many years, but the basics are the same:
* You need money to make a purchase
* Someone has money to lend
* You borrow the money you require
* The lender lends the money, and charges a fee or interest for this transaction
* Terms of repayment are agreed on, such as a monthly payment and the length of the loan
In its simplest terms, that is a loan.
However today we need to add a different component, the scoring aspect, how lenders determine who is a good risk or not.
Years ago it may be the banker or lender knew you and your family, or you pledged something as collateral to secure the loan.
Today loans are all about credit scores.
Credit scores and credit scoring, is a numerical score assigned to someone which aids in the prediction of the probability that someone will repay a loan.
A high credit score = good
A low credit score = bad
Credit scores are made up of five (5) factors:
* Payment history: 35% Your payment history makes up the bulk of your credit score, or 35%. As you can imagine, making payments to your accounts is important, and by not doing so, you can really lower your credit score.
* Balances on accounts: 30% The balances you have on your accounts makes up another large portion of your credit score. So if you are deeply in debt, and miss some payments, your credit score will drop quickly.
* Age of your credit accounts: 15% How long you have been in the credit bureaus and receiving credit makes up a portion of your credit score as well. This is usually based on your oldest credit accounts.
* Types of accounts: 10% The types of kinds of credit accounts you have also influences your credit score. Mainstream bank loans can carry more weight than payday loans or catalogues.
* How often you apply for credit: 10% By applying for credit it can reduce your credit score. Too many applications for credit has a reverse effect on your credit score.
Before you go an apply for a loan, you need to do some research and some prep work to insure you get approved for the loan, and also to increase your odds of being approved.
Get a copy of your credit history and credit score to begin with. This is free, and you need to know if there are any errors or omissions on your credit history. Even if you have never had credit, you may have a report and you want to insure your correct name, address, and all details are correct.
You also may want to enrol on the Electoral Roll.
Many lenders use this to verify your address and identity.
Next up, what type of loan do you need?
Affordability: Are you wanting to buy a car, get a credit card, personal loan, whatever type of loan you need, you need to research the interest rates, and affordability.
Just because you feel you can afford a loan payment of £300 a month does not mean a lender will agree. You ned to show affordability, which means breaking down your income and expenses.
This will show you, and a lender what you can really afford.
Deposit: If you are seeking out a car loan to buy a car, having a deposit helps, it not only reduces the amount you need to borrow, it reduces the lenders risk or exposure on the loan. The larger your deposit, the more likely you are to be approved for the loan.
Guarantor: For some borrowers with no real credit history, or someone who may have bad credit, having a guarantor helps in getting approved for a loan.
A guarantor is someone who knows you and knows you will repay the loan, and if you fail to pay payments, they will pay the payments until the time comes that you can pay them.
Getting your first loan does not need to be daunting or full of surprises, you just need to do a little research and homework prior to applying.