In at least a vague sense, a credit score is a well-known concept. For many people, particularly those who have had problems with debt, it is also a scary one. But many people are not entirely clear on what a credit score actually is. By the same token, they are also unsure on just how big an impact it will have on any attempt they make to obtain a loan.
A credit score is a record of certain factors and events that helps credit providers assess the amount of risk that would be involved in lending to you. Details on loans you have taken out before, including things such as credit cards, will appear along with any major negative events such as county court judgements or bankruptcy.
If you have had trouble repaying a loan and defaulted on payments, this will show up as a point against you. A lot of the things that can appear on a credit score might be surprising. For example, late bill payments may show up. In short, it covers anything that may indicate your ability to repay a loan and the amount of risk involved in lending to you.
There are, however, some myths associated with credit scores. For example, many people believe that there is such a thing as a credit black list. Anybody who is on the list, they believe, will be unable to secure any kind of credit whatsoever. Thankfully, this is not true. The credit black list quite simply does not exist.
Many people also make the mistake of thinking that if they have never had a loan, their credit score will be high and they will be an attractive, low-risk customer to lenders. Unfortunately, this is also untrue. At first it seems to make sense, as it shows financial stability and means you will have no record of defaulting on payments. However, it also makes you an unknown quantity. If you have never had a loan, credit providers do not know how reliable you will prove to be when you do start to borrow funds.
It is true that a poor credit score could stop you getting a loan, but this is not always the case. In fact, those with lower scores can almost always obtain a loan from somewhere — perhaps a specialist loan or simply a normal loan from the right provider on the correct terms.
If you have a poor credit score, some lenders may turn you down while others may still be willing to lend to you. However, it might affect the terms on offer. In return for lending to somebody perceived as a higher-risk customer, loan providers will understandably want a better return on their investment, and the result is that you will likely be subject to higher rates of interest.
You may be able to obtain better terms, as well as get yourself accepted more easily, if you seek a secured loan. This is where you provide some possession of suitable value as security for the loan, which may be taken and sold on behalf of the provider if you do not keep up repayments. However, while secured loans may be useful in the right circumstances, you should be very aware of the risk that you may lose the item you offer as security if you fail to keep up repayments. For this reason, it can be inadvisable to secure a loan against something essential such as your home.
Many people who are dealing with multiple debts seek out a consolidation loan. While debtors should generally be careful about incurring new debts to pay off old ones, debt consolidation loans can be very useful. This process involves taking out a single loan which will be used to pay off multiple older debts and replace them with a single, more manageable repayment plan.