Have you ever had trouble getting a loan or a credit card? We often feel as if the system has been designed to prevent us from accessing the money we need. It is easy to see why some people believe that the credit score system is used to tie people to their debts and bad financial judgments of years past as long as possible.
We generally understand what a credit score is, but we often ignore the details surrounding the system that calculates it. Here are some of the most common questions about credit scores:
- Why are our past financial mistakes still relevant today and why are they negatively affecting our borrowing capacity?
- Why do banks and lenders give so much importance to this rating and not to our income and assets?
- Why does building credit take so much time and effort?
The lower the credit rating, the higher the interest rate offered and the higher the profits of the lenders. The credit score system definitely helps companies and banks to make money. The important thing is not to take it personally; what is important to understand is that borrowing money is not a free service. So in a case where our interest rate is too high for our taste it’s still better than having a request completely denied.
How do lenders find their borrowers?
As mentioned above, lending money is a business just like a grocery store or a restaurant. Most legitimate lenders are not dishonest, they simply want to meet the needs of their consumers. Unfortunately, some borrowers have bad intentions and therefore lenders protect themselves from risks in several ways:
- Lending on a large scale
To be profitable, companies must lend to a large number of people.
- To face the risks
There will always be some borrowers who can not or will not repay their loan. To reduce this risk, borrowers use tools such as credit rating to evaluate a potential client.
- Offer a competitive product
Consumers are buying their interest rates and choosing the lowest, so it is important for the lender to offer competitive rates to increase their customer base.
How is the credit rating used by lenders?
The credit rating is used to make a quick and informed decision about a potential customer. A decision made quickly means that they will be able to evaluate more people and thus offer loans faster and when their clients need it. So this credit score will determine if you are approved for a loan and for what amount, but this is only part of the process.
Credit ratings are confusing and so consumers are frustrated simply because they do not understand them. It is to your advantage to research and understand this process as it will follow you for many years.
Also do not forget that lenders want to lend money, it’s their livelihood. Their goal is not to sideline potential customers, but to reduce their financial risks.
What can be done as a borrower?
It may seem contrary to our intuition, but when we try to make a loan, the ball is in our camp! We are in control of our finances and it is we who can have a positive or negative effect on our credit rating.
This rating is important, and therefore our responsibility to keep it healthy by making good financial decisions and staying informed as much as possible.