Thinking of Applying for a Loan?
Credit Matters!
If you are considering apply
for a loan of any type, you will
first want to ensure that your credit rating is accurate. Why? Your credit report will be the first place that
a potential creditor will look to
help evaluate whether or not you
will be a low-risk customer. There
are two major credit reporting agencies
in Canada, Equifax and TransUnion,
and it's a great idea to check your report from both agencies.
What if you pay your bills on time
every single month? For starters,
keep up this good habit! However,
even if you think your credit is
squeaky-clean, it's worth
it to check, since it's in
your best interests to ensure that
all of the information in your credit
file is up-to-date and accurate.
In fact, studies show that many
credit files contain inaccuracies
that could affect your credit rating - and even lead to the rejection
of a loan application! Imagine finding
out after the fact that you were
rejected for a loan because of a
simple human error or technical
glitch. That's why reviewing
your credit report beforehand may
be a good idea, giving you time
to dispute any items that may be
the result of simple human error
or a technical glitch.
Before you begin the application
process, check your credit report
for the following items:
Clerical errors
Sometimes credit reports contain
inaccuracies that are the result
of a computer glitch or a clerical
error. These may include payments
not credited, late payments, or
data mixed in from a credit file
of someone with a name similar to
yours. By reviewing your credit report before the lenders do, you'll
see exactly what they will see -
but have the chance to fix anything
that's wrong before it's
too late!
The solution: Keep in mind that
it's up to you to dispute
any information that you consider
inaccurate, but the effort involved
can be well worth it in the long
run.
Excess unused credit
Do you have credit cards in your
wallet that you only sporadically
use? Any that you never use? Consider
that these can in fact hurt your
credit rating, since lenders sometimes
see too much 'revolving debt' as a negative when reviewing loan
applications.
The solution: Consider reducing
the number of revolving charge accounts
that are listed as active on your
credit report. If you've stopped
using a credit account, close it
if you don't plan to use it
anymore. Important: Make sure your
creditor notates the account "closed
at consumer's request" - otherwise, a prospective lender
might assume the creditor closed
the account for other reasons.
A few credit cards managed well
may improve your chances for a loan.
Maxed-out cards are undesirable,
and interestingly enough, cards
with lots of room on them can be
a bad thing too. You can always
call a creditor and ask them to
drop the limit of your card, which
can help take out some of that excess
room.
Late payments
If you slipped up and have a couple
of 30-day late payment entries that
are accurate, don't worry
too much: if your credit is good
otherwise, often a lender will overlook
this if you explain the situation.
However, 60-day late payments are
less likely to be overlooked. You
may be 'red flagged' and if the loan is still granted,
the interest might be higher and
the terms less favourable.
The solution: Be prepared to explain
any late payments. Also, since lenders
usually look most closely at the
last two years, if you've
slipped up lately, make a solid
effort to get those payments in
on time, every time.
Unnecessary inquiries
Did you know that each time a prospective
creditor looks at your report, an
inquiry notation is added to your
file? Most inquiries stay on your credit report for up to two years. Note,
however, that inquiries you make
yourself, during screening for a
pre-approved offer of credit, or
as part of a background check for
employment purposes are not reported
to potential credit grantors.
The solution: Avoid over-applying
for credit and running up excessive
inquiries, simply because you don't
want lenders or creditors to assume
that you have financial difficulties
or are taking on more debt than
you can repay. Of course, lenders
understand that some inquiries will
be as a result of shopping around
for the best rates on a loan, so
they often overlook a block of inquiries
within a very recent period. It
can help to note this in the application
process.
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