Loans and Credit Score – How they are interdependent?
A loan is taken out when an individual or an organization
lends money to another individual or organization. The borrower incurs the debt
and pays interest until the debt is repaid in full. A loan may be secured, like
a mortgage loan or unsecured like bank overdrafts, personal loans and credit
cards.
What is a Credit
Score?
A credit score is something like a
grade that is given to borrowers based on their history or repayments on credit
or loans. Credit scores are used as a parameter or tool to assess an
individual’s creditworthiness, that is, if you are likely to pay back the money
which is loaned to you. Credit scores are made up of certain factors like:
- · Amount of debt owed
- · Payment history
- · Age of credit history
- · Credit mix
- · New lines of credit
The most important factor is, of course, payment history
which accounts for 35% of the score, followed by the amount
of debt owed at 30%. The ability to pay back credit on time is a huge factor in
your creditworthiness, as is your current level of outstanding debt.
Kinds of Credit
There are 3 kinds of credit accounts – open, installment and
revolving.
Open: Open credit is very rare and refers to an account
where you can borrow up to the maximum amount, which must be paid back in full
each month. This is generally associated with charge cards which are very
different from credit cards.
Installment: This refers to a general loan with installment
option for repayment. Here, a set amount is fixed for loan and there is a
regular repayment schedule. This type of credit is the most common and includes
examples like student loans, auto
loans, personal loans or mortgages.
Revolving: Revolving credit is a line of credit from which
you can freely borrow but there is a cap on the on the credit limit, that is
the amount that can be used at a given time. This typically relates to credit
cards and home equity credit. It requires monthly repayments and there are
interest charges for carrying a balance.
Using Credit
It is important to have a good score, without which it will
be difficult to get loans from traditional sources. Therefore, even if they
have enough cash, many people use credit to build a credit record, so that they
can be eligible for loans if needed. Having a mix of credit types and paying
them off in time shows that you are responsible and less at risk of
non-repayment. Your credit risk will be lower as you are depicting the ability
to manage credit and the repayments on time.
There are options like car title loans online that will not affect the credit scores or
even consider it if you need to take out a loan. All you need to do is search
for car title loan places near me and
find lenders that will forward a loan on your car for a short period of time,
without looking at your credit scores, Visit site.
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