When you go for a Private Loan, the first thing the private lender would want to make sure is how reliable you are at settling debts. Although some lenders may grant you a loan based on your salary or other income particulars submitted by you, most lenders would want to know how creditworthy you are and whether you have a good history of creditworthiness. The tool used by the lenders to evaluate your creditworthiness is called a Credit Score; and if you don’t have a credit score, they will simply refuse your loan! This can be a very frustrating experience.
Credit Score, briefly, is an index calculated based on your past performance with regard to settlement of debts. These data are stored in databases maintained by credit bureaus and credit reporting agencies whose business it is to have and maintain such databases. The impact of this index and how it is calculated is illustrated further down below in this article. But before that, what anybody would like to know is how you could have a credit score if you have not taken any loans before, and this is the first time that you have approached a private lender for any loan.
Once you have gone to a private lender and been denied a loan on the grounds of your not having a credit score, you may stand a better chance by introducing a cosigner of good credit standing to jointly sign your application.
Therefore, you have to plan for such an eventuality in advance (say, about 2 years before you think you may have to go for a private loan to finance your educational costs).
Here are a few tips for building a credit score and improving on it.
Open a savings account or a checking account or both (although this may not go to your credit file maintained by credit bureaus, still this can be useful in showing that you have money and are aware of money management).
Pay your utility bills on time maintaining suitable records such as check counterfoils etc. (the number of accounts currently in operation and the length of time for which they are paid on time has a big bearing on your credit score; you may also apply for a department store credit card which is quite easy to obtain; if you are in college, then you can also obtain a Visa or Master Card too without any credit history; there is another option of obtaining a secured credit card with credit limit fixed no higher than the deposit placed by you with a financial institution as collateral (also make sure that this financial institution reports to all major credit bureaus).
In the usage of whatever credit cards, keep the balances low. Stretching your credit cards to its maximum and using far too much of your available credit can be construed as a sign of your over extended and adventurous inclinations and financial immaturity. Also note to pay off the balances in full, each month. Auto loans and mortgages are a better form of debt.
Avoid opening new accounts that you are not going to use, because having too many accounts and the time since you last opened an account will adversely affect your credit score. At the same time do not close accounts still current even though you don’t use them. The length of your credit history in an account as well as the number of accounts with no late payments has positive impacts. What is important is to have accounts with positive history than having no history due to your having no accounts.
Pay down all your installment loans. The ratio of your current balance to the original balance will be recognized as a measure of your ability and tendency to repay debts fast. If looking for a new installment plan, complete all your inquiries within a short space of time such as (14 days) which is then considered as only a single event.
If you have an account with a bad history, paying it off will not erase the bad score from history. It is better to keep that account active and keep on paying regularly as per the agreement since the older bad score will not carry as much weight as the more recent good scores to your credit. This is the only way to provide positive information to compensate for the earlier negative information.
The last thing you should do is to file bankruptcy, for this affects your credit score almost to a point of no return. Bankruptcy could affect your credit for 7 to 10 years!
What is a Credit Score? – the full explanation.
This is an Index of the creditworthiness of a potential borrower. The Index most popularly used by lenders is the FICO score developed by the Fair Isaac Corporation, which has a range between 300 points (min) and 850 (max); with lower scores indicating poor creditworthiness and higher scores indicating higher creditworthiness. The minimum points required to be eligible for a private loan according to current statistics is 630 – 650 while a good average FICO score to aim at is 710 in order to obtain better terms of credit including a reduced rate of interest.
Distribution of Private Student Loan Borrowers (by Loan Volume) within the FICO scale of scores according to recent trends indicate the following levels of borrowers. (It will be noted that the two score ranges given are overlapping)
FICO Score Range |
Borrowers by Loan Volume % |
>650 - <850 (max) |
85% to 95% |
>760 - <850 (max) |
21% to 25% |
Credit Bureaus and Credit Reporting Agencies store and maintain databases of information collected from various lenders with regard to loans granted and histories of corresponding repayments in respect of named and identified borrowers. This information is supplied on request to future lenders.
Calculation of the FICO Credit Score:
The weights assigned to the components of a loan transaction are given below which will give the reader an indication of the importance placed on the respective components in arriving at a final single value known as the credit score for any given individual.
Score Component |
Weight % |
Payment History |
35% |
Amounts Owed |
30% |
Length of Credit History |
15% |
New History |
10% |
Types of Credit used |
10% |
Total |
100% |
Gus Taperman holds a Bachelor's degree in Commerce and completed his master's in Business Administration . He is working as writer and financial consultant to find a Personal loans, Debt consolidation, home equity loans at cheap rates visit www.taperman.com