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.
Next Post »