When it comes to credit, we’re often left confused. Where you might be able to survive on bad credit, it generally won’t get you very far in your financial life. When it comes to loans, having a bad credit score can cause high-interest rates, expensive fees and endless financial stress. Focusing on improving your credit score is the first step to increase your chances of loan approval.
Recently, Loans Canada conducted a study on Financial Literacy vs. Financial Well-Being And Credit-Constrained Canadians and discovered that 55% of respondents are unsure of all the factors that affect the cost of a loan. Understanding the cost of a loan can help borrowers in Canada make better decisions when choosing a product that’s right for them and ultimately, save money.
What Factors Affect The Cost Of A Loan?
A loan can put you in debt for some time, so it’s important to understand the full cost of a loan before considering applying for one.
- Amount Borrowed – It’s important to compare how much you’re borrowing alongside how much interest and other fees you’re paying, to ensure you can fully afford the loan.
- Interest – Find out if your loan interest rate is fixed or variable. Each lender will apply an interest rate depending on how qualified you are for the loan.
- Fees – There may be extra fees such as administration costs.
- Taxes – Depending on your lender and even your province, you may have certain taxes added on to your final amount.
- Loan Term – It’s important to choose the right payment frequency that fits with your financial goals, as you may end up being in debt for a prolonged period which can be costly.
Alongside these five factors that affect the cost of your loan, a good credit score can help give you more financial freedom, better rates and less financial stress when it comes to loan approval.
What Is A Good Credit Score?
A credit score is a three-digit number that provides you with a quick snapshot of what’s on your credit report. It’s derived from factors such as credit history, credit utilization, current and past debt and demonstrates if you’re a high-risk or low-risk borrower. A credit score ranges in value from 300 (poor) to 900 (excellent), with 660 being considered an average but fair score. Your credit score is designed to help creditors, lenders and banks make an informed decision on whether they will grant you credit, and if approved, how much credit and at what rate.
Lenders will look at your credit score and decide from there whether you’re financially responsible. They will consider someone who will be reliable and timely with paying back their debt. When you’re stuck in an endless cycle of loan rejections, it’s important to remember that boosting your credit score may be the best possible way to get over that first hurdle.
How Is A Credit Score Calculated?
Depending on where you check your credit score, your final score might be different. A person’s credit report is a list of the data the bureau (Equifax or Transunion) producing that report has compiled for that person. Each reporting agency may have slightly different data and use a different scoring model and algorithm. This could explain why our credit score may differ.
To calculate a credit score, numerical weights are placed on different aspects of your credit file. Then, a mathematical formula is used to produce your final credit score.
How Does A Good Credit Score Help With Loan Approval?
Your credit score reflects your credit history. It shows how financially responsible you are. So, it’s clear that having a good credit score will provide you with many benefits for loan approval. Let’s discover five:
- Approval For Low-Interest Rates
If you manage to maintain a good credit score, you will be approved for a loan with lower interest rates. One concerning aspect for many Canadians when applying for a loan is the thought of paying money they don’t have, on interest. If you have a bad credit score, which is below 660, your interest will be pricey. The secret to low interest is an excellent credit score. - Approval For A Wide Range Of Loans
With a good credit score, it opens the doors for you to obtain almost any financial product. With a poor credit score, your options are limited, and your loans tend to be more expensive. An excellent credit score allows you to obtain personal loans, car loans, mortgage and more at better rates. - Approval For A Higher Limit
With a poor credit score, you can still obtain a loan, but you may not be able to borrow the amount of money you need. A person with a higher credit score will have the opportunity from banks, creditors and lenders to borrow what they wish, within reason. Of course, this does depend on what your monthly income is too. - The Ability To Shop Around
A good credit score gives you the leverage to discuss a lower interest rate on a new loan. If you need more bargaining power, you can shop around. You can then check out other offers that you’ve received from other companies based on your credit score. If you have a poor credit score, your loan terms will generally be set in stone, with no room to shop around or to negotiate your terms. - More Opportunities
A loan can help you get that dream car or mortgage, or help you do much-needed renovations in your home. Having a good credit score allows you to obtain a loan stress-free and at a good value, which provides you with more financial opportunities to plan for your future.
How Can I Improve My Credit Score?
Building your credit score isn’t easy and it won’t happen overnight. It’s important to set a realistic target credit score when beginning your mission in boosting your score. You must ensure that you pay your debts on time, budget accordingly, track your spending and monitor your score to successfully see an improvement in your credit score.
Grace Gearon is Content Marketing Coordinator at Marble Financial |Contributing Writer for Loans Canada
