A credit report speaks to debt management. The more sensibly you manage your debts, the better you score, and vice-versa. Regardless of the reasons, your credit report is perused for an affordability check when you are to borrow money.
It can work for or against you, so not to mention, your credit file should be up to scratch. Almost all loans require a credit check except payday loans. These are small emergency loans approved just based on your income statement.
These loans are expensive because they do not involve a credit check. Your credit file serves as the basis for whether or not a lender should loan you.
What is a credit file?
A credit file is a statement that credit reference agencies, Experian, Equifax, and TransUnion, maintain for you, storing information about the types of debts you owe, payments you have made, missed payments, late payments, defaults, and the like. It records information about all kinds of debts, including mortgages or bad credit loans from a direct lender.
Based on the information given above, a three-digit score is calculated by credit bureaus, called a credit score. Each time your lender checks your credit report, you will lose your credit points due to search footprints showing up.
Each hard inquiry will pull five points, so it can drastically lower down your credit score.
Why do lenders check your credit file?
Your credit report gives a lender insight into your affordability. Although your income statement proves your repaying capacity, your credit file will demonstrate how loyal you have been to your previous debts.
In other words, it measures the risk involved in lending you money. When your credit history is good, you are more likely to get money at lower interest rates. Bad credit rating results in higher interest rates. Moreover, you will be restricted to many borrowing options.
Your credit report is more than your credit score
Many borrowers think that a lender checks the credit report to know their credit score, but the fact is that they are not particularly interested in it. They are rather interested in assessing the risk involved in loaning you money, which they cannot just decide on based on your score.
For instance, suppose your credit score is 580, but the last missed payment or default dates back one and a half years. It shows that you slipped up, but ever since, you successfully managed to be back in the driving seat.
Some lenders like Onestoploansolution do not say you are a risky borrower just because your credit score has got the blow. They will assess your overall situation – the reason for falling behind a payment or whether you tried to do it up. Of course, when you prove that it was just a temporary phase, you are still likely to get money at a lower interest rate.
Why do credit scores go down when a credit check is run?
Many of you often wonder why your credit score is affected when a credit check is made. In fact, some find it unfair, but there is one logical reason behind it. Borrowing is not a good sign as it reflects that you fall down on money management.
Even if you are living paycheque to paycheque, it is assumed that you have been irresponsible with money management. This is why every time you apply for a loan, you lose some points. However, you do not always will you lose your credit points.
There are two types of search queries: hard and soft. Lenders run a hard credit check when they want to know whether they should lend you money or not. These inquiries show up on your credit report and can be seen by other lenders.
However, a soft credit check involves making soft search footprints that other lenders cannot see. Here are the situations when soft inquiries are made:
- When you see your credit report on your own.
- When an employer looks over your credit report before offering an appointment letter
- When a landlord checks your credit score to decide if you are a reliable tenant
Soft inquiries do not affect your credit rating.
When should you check your credit report?
You should check your credit report at least once a year. It will let you know if there are errors you should rectify immediately. You can get a copy of your credit report free of cost once a year. If you find any errors, you can dispute them. This will protect your credit score.
Further, when you are to take out a large loan like a mortgage or car loan, you should check your credit report before putting in the loan application. Many people find it hard to check their credit files, and some do not do it to avoid fees.
It is always advisable that you should regularly check your credit file so you know it does not consist of false information that may take a toll on your credit points. If you find something wrong, the changes will not be immediately made.
Credit reference agencies do not make a change to the report immediately as you file a complaint. They will tally everything with the lender before making any changes. It will be investigated if your complaint is valid. It will take 28 days to get it rectified.
The final word
A credit file plays a paramount role when it comes to borrowing money at affordable interest rates. It shows how carefully you managed your previous payments. Your credit score will be good if you clear your debts on time and bad if you do not clear your dues on time.
A stellar credit report ensures that you will get money at the most affordable interest rates. However, if your credit score is not so impressive, you will end up getting money at outrageously higher interest rates.
It is always advisable that you check your credit report to ensure that it is in good condition. If you borrow money, try to repay it on time.
Mark Williams works as one of the Loan Advisors at a direct lender firm, Onestoploansolution. He has been working with the lender for about 15 years. He has been known to facilitate his employer in remarkable ways from writing to consulting and whatnot. He is a professional who wants to explore more of the UK financial market, the loan products and how customer requirement changes with time.
