Lenders do a credit check to assess the credit background of an individual that is attempting to borrow. The main reason for credit checks is to provide lenders with base information about how risky the borrower is. By performing credit checks, they are able to approve or disapprove the loan application and they are able to determine which borrower will give them the highest profit margin. Probably the most important step in determining the reliability of the borrower is performing a credit check.
A credit check is very important for lenders it allows them to have a glimpse into the borrower’s capability of paying their debts. For a lender, it’s their guard against people who always fails to pay their obligations on time and in full. Credit checks can be terrifying for those who possesses bad credit scores.
When performing a credit check, the financial institutions will ask for credit reports and history from Equifax or TransUnion about the borrower. The credit report contains some or all the following information:
- Date of Birth
- Social Security Number
- Current address
- Current job and income
- Past address
- Past job history
- Payment history
By obtaining this information, the lender will evaluate the checklist and will decide whether the application is approved and whether it will be of higher interest rates or normal rates. It will also serve as the basis for denying a loan application. In Canada, credit checks are a very important insight and most Canadians struggle, some with difficulty to make their credit score reputable.
Credit scores and credit checks are very much related to each other. Having a good credit score will reflect in a great result in credit checks and in turn, a loan application is approved easily. Having a bad credit score on the other hand, will likely result in a failed loan application. In order to pass a credit check, you should always try to maintain a good credit score. Maintaining a good credit score can be pain for people without discipline.
How to maintain a good credit score?
- Pay your payments earlier
- Try to minimize credit usage
- Limit unnecessary purchases
- Do not close credit card accounts – the longer your credit card is, the more points you will get
- Make sure you make loans that you can pay on the right time
- Keep card balances below 10%, but if you can’t you may not exceed up to 35%
- Limit credit application – do not apply for credit loans, etc. in a succession. Take credit only when you really need it
- Take time reading your credit report and evaluate your needs – discard unnecessary expenditures to lessen your monthly payments
How to improve a bad credit score?
- Apply for a secured credit card– applying for a secured credit card is easier than applying for other loans when you are in a bad credit
- Use your secured credit card and pay it off to reflect good rating to your credit score
- Pay your debts on time
- You might want to try lending unsecured loans
- Unsecured loans will not greatly affect your credit score
- It can be used as a payment for your debts
- Make sure you can still pay it off
- Apply for a new credit but not too much. One or two may do and keep it paid on time
- Gas credit card
- Secured credit card (mentioned earlier)
- Department store card
- Even a gym membership may do
- Avoid prepaid credit cards – they will never help build your credit score
- Pay all of your responsibilities on time – this will help you build a good credit habit
A credit check is a crucial part of a loan application and your credit score is taken into consideration. Make sure you will be able to build or maintain a good credit score. Why? Because today, it is increasingly difficult to receive financial help.