Getting a credit card or a home loan is a big step for some. But to be denied due to a less-than-perfect credit rating is pretty disheartening. So how can you make it right?
How your credit history is tracked
Financial institutions use your credit history to sort out the good customers from the irresponsible ones. Without these ratings, we have an onslaught of shady borrowers with unlimited funds at their fingertips. However, having this safeguard also means you might end up paying for the sins of your financial past.
Everyone?s credit history is recorded on something called a credit file. This file records any applications for credit you?ve entered into and takes note of any history of bankruptcy, defaults or black marks against your name. A default is listed on your credit file if you have failed to make good on three consecutive loan payments, and a payment plan has not been negotiated with the lender. If you defaulted on your loan or have a history of paying off debts late or insufficiently, a black mark will be recorded on your file.
It?s not just loans that get recorded on your file. All applications for credit are recorded – such as credit cards, mobile phone plans, home loans, even applications to get the electricity connected are recorded – basically any arrangement where you?ve used credit or applied for credit.
When applying for a loan, lenders (credit providers, financial institutions, retailers etc.) will meticulously pour through your credit file before approving or declining your application. Some lenders will use this information to “credit score” the applicant. They will look at a number of factors, including your current employment, income, your assets, any outstanding loans and your credit history to determine if you are a good risk or not. If your credit score indicates that you are a good risk than your application is usually approved.
Remember: it pays to make good any outstanding debts and ensure your records are up to date.