There are often different situations in life and even if finances are carefully planned, the need to use a financial service such as a loan may arise. One of the most important factors that lenders take into account when evaluating a loan application is the customer’s credit history. A positive credit history means that the customer is less risky, so it is an opportunity to get more favorable loan terms. On the other hand, if the credit history is negative, the customer is defined as risky and the loan may have worse terms or may be refused.
By taking on financial obligations, a person can improve or, on the contrary, damage his credit history. In this article, we explain what credit history is and how different types of credit affect your credit history.
What is a credit report?
A credit history is an overview of a person’s past and present financial obligations, which shows both a detailed description of the obligations (amount, date of issue, name of the lender, etc.) and the discipline of their execution (whether and what are the delays, how long the obligations were, etc.). The credit history begins to be formed at the moment when a person assumes the first financial obligations – takes out a loan, buys a product on lease, uses mobile communication services, etc.
Credit history can be affected by the following factors:
Payment Discipline
It is taken into account whether and to what extent payments have been delayed. Of course, payments should not be delayed, not even for a few days and of a small amount, however, if for some reason you have ever missed a payment, you should take into account that this does not immediately mean that you will end up on the list of debtors and your credit history will be damaged. For example, the credit register of the Bank of Latvia contains information about those who have delayed payment for at least 90 days and whose payment exceeds EUR 150.
Amount of existing financial obligations
The ratio of financial obligations to income, or solvency, is taken into account. Monthly loan payments should not exceed 20-30% of monthly income.
Credit history age
It is taken into account when the first financial commitment is made. Many believe that having never had any financial obligations means having a good credit history, but in reality, there is no such thing as a good credit history or bad credit history, because no information is available to evaluate human discipline. It is better to have at least one successful financial commitment.
New financial obligations
It is taken into account whether and how much financial obligations have been taken recently. If several loans have recently been taken out, it may appear that the person has financial problems that are solved with the help of loans. On the other hand, it shows a light-hearted attitude towards financial obligations and their honest repayment.
Type of financial commitment
It is taken into account whether and what financial obligations have been taken – credit and its type, leasing and purchased goods, etc. For example, fast loans look worse in the context of credit history than, for example, a consumer loan or a mortgage loan.
How can different loans affect credit history?
Consumer loans
The most popular long-term loans that can be used for various purposes. In most cases, their loan amount is up to 25,000 EUR, the repayment term varies from a few months to several years, while the interest rate is lower than for short-term loans, but higher than, for example, a mortgage loan. In order to reduce as much as possible the financial burden caused by borrowing a consumer loan and the possibility of damaging your credit history, you should carefully choose both the amount and the repayment term – a longer term means a smaller monthly payment, but thus you pay more in terms of interest. It is also important that consumer credit is used only for serious needs. A successfully repaid consumer loan can slightly improve your credit history.
Mortgage loans
Long-term loan intended for the purchase of real estate. The loan amount can be up to several hundred thousand EUR, the repayment term varies from a few years to a few tens of years, while the interest rate is lower than for all other loans. In order to reduce as much as possible the financial burden caused by borrowing a mortgage loan and the possibility of damaging your credit history, you should carefully evaluate both the amount and the repayment term, as well as the property purchased with its help. A successfully repaid mortgage loan can significantly improve your credit history.
Credit cards
The borrower is granted a credit limit that can be spent on various needs, paying interest only on the amount used. Whether it is a short-term or long-term loan depends on the borrower himself, how long the used amount is repaid. The loan amount is up to a couple of thousand EUR, the maximum repayment period is up to a couple of years. In order to reduce as much as possible the financial burden caused by a credit card and the possibility of damaging your credit history, you should carefully evaluate the purpose for which the assigned credit limit is used, the amount of the required amount and the way the amount is repaid – making the minimum monthly payment can reduce the budget burden. however, the sooner the amount used is repaid, the more you can save on interest.
Regardless of the type of loan, late payments affect the credit history only and only negatively, so it should be remembered that any loan is a serious obligation and before receiving a loan, one should carefully evaluate its necessity, suitability for the situation, as well as one’s ability to repay it in good faith.
How to improve your credit history?
Credit history is taken into account and evaluated not only by lenders, but also by service providers, sellers who offer to buy something on installments and even employers. For this reason, you should treat your credit report very responsibly, because even though it may not be relevant to you now, you can never predict your future financial needs. Credit history directly affects financial opportunities, so it is important to take care of it.
Information about your credit history can be viewed free of charge on the website of the Credit Register of the Bank of Latvia, as well as on the website of the Credit Information Bureau. One should try to keep it positive and if necessary improve it. Here are a few ways to improve your credit:
Make all payments on time!
Unpaid bills are one of the most common ways to damage your credit history, so all payments, not just loan payments, but also utility bills, cell phone bills, fines, etc., should always be paid on time. Setting up reminders or setting up automatic payments may help to make sure you don’t forget a payment.
Take care of a stable income and increase your income!
The longer a person works at one workplace, the more it shows stability and reliability. It should be noted that the unemployment benefit is not a stable source of income, while the pension is. It is also a good idea to increase your income. If you have a hobby, knowledge and/or skills that can be turned into profit – try to realize it!
Avoid frequent borrowing!
Evaluate each loan responsibly and try not to borrow too often. Borrow only when there are no other solutions and you are sure that you will be able to repay the loan in good faith.
Common mistakes
The most common reasons for damaging the credit history are late payments and frequent loan defaults. In order to avoid these mistakes, every person should plan their budget – it will help to track income and expenses, thus being able to avoid unnecessary spending, plan loan repayment, and create a savings.
When applying for a loan, credit check is inevitable, therefore the question may arise – whether loans with a bad credit history are available and whether it is possible consolidate loans with bad credit? Yes, there are lenders who are willing to take the risk and give loans to people with bad credit, but the loan terms are likely to be less friendly. In such cases, a bond is most often required. Credit against collateral and other loans are also offered by Sefinance.lv.
2024-02-14 13:53:17
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