Time to apply for a loan? Check your credit rating first! When applying for a loan, the bank looks at your creditworthiness to assess your ability to pay. This is how you can improve it – and increase your chances of getting a lower interest rate.
So, how do you get a good credit score?
In short: 5 tricks to raise your credit rating
- Make a credit report on yourself and start from it
- Use a single credit card – cancel other unused credits and cards
- Always pay your invoices well in advance
- Collect your loans into a larger private loan with a single bank
- Make a budget for loan repayments and reduced costs over time
What is creditworthiness?/Credit rating?
Your credit rating is a measure of your ability to repay your borrowed money to the bank – a kind of risk profile. The bank’s credit rating of you affects how much money you can borrow and what interest you get on your loan.
The more secure and stable your finances are, the greater the chance that you can repay the loan, and the lower the interest rate you will be able to get.
Therefore, it is important that your credit rating is as high as possible when applying for a loan.
In-depth explanation on what creditworthiness/credit rating is:
Creditworthiness is a measure of your repayment ability and it is calculated based on a number of different factors. The credit rating is measured on a scale and you can have low, medium or high credit rating.
Before a company grants you a subscription, a loan or a credit, they want to see your credit rating to determine if it is safe to grant you or not.
They simply want proof that you will be able to repay what you borrow from them, or pay the invoices that come with a subscription or service. They obtain your credit rating by requesting a so-called credit report.
Creditworthiness can vary depending on what your life situation looks like and how it changes.
A high credit rating usually means a person with a fixed income, few or no loans and who is the owner of a condominium.
Medium creditworthiness can apply, for example, to a person with a fixed income, but with a few small loans and housing in a tenancy that gives high expenses, which makes the margins small and the risk for the company somewhat higher.
Low creditworthiness is found in people who already have many loans, as well as payment remarks, part-time or hourly employment and who will thus have difficulty handling more loans.
If you have a low credit rating, the lender takes a greater risk and thus gives a higher interest rate.
5 ways to build your credit score
1. Reality check: Take a credit check on yourself
Stay one step ahead of the bank by taking a credit report on yourself. It gives you a good overview of your risk profile and your so-called credit rating, which indicates how prosperous your personal finances and ability to pay are.
With a credit report, you see, among other things, your existing loans and credits, what credit inquiries have been made of you and what credit rating you have – a bit like a personal finance CV.
Once you have insight into your credit rating, it also becomes clear what you can do to improve it. For example, you may have unused credits in several places that you can cancel, which raises your credit rating.
If you have payment remarks, you can also see when these will disappear. You can easily make a credit report on the internet, just google.
2. Terminate unused credits
Every time you choose to pay on credit with a company for the first time, for example when you shop for clothes online against an invoice, or buy a new TV and are offered a store-unique credit card, the company can do a credit check on you.
This is called a credit request and is made because the company wants to assess whether you will be able to pay for your purchased goods on time.
A credit report appears as a listing in your credit rating.
The more credit requests you have, the worse your credit rating will be, especially if several requests have been made in a shorter period of time.
In the bank’s eyes, it looks as if you have tried to take out several small loans or prefer to postpone the payment of things, which signals an insecure economy.
If you were to suddenly take advantage of all the unused credits you have today, you might find yourself in a situation where you simply cannot pay.
Therefore, cancel all credits that are unused or unnecessary.
The fewer unutilized credits and credit requests you have, the better your credit rating. A tip is that you get a credit card with good terms that you use for all purchases.
3. Always pay on time
Reduce the risk of payment remarks by always paying your invoices on time. Do not wait until the due date – feel free to pay as early as possible, so you avoid any payment reminders.
If you have difficulty remembering it or easily lose your invoices, it may be an idea to plan certain days of the month when you handle your payments.
Always paying invoices on time lays the foundation for good personal finances and improves your chances of maintaining a good credit rating.
4. Collect your loans
Just as many credit reports have a negative effect on your credit rating, your credit rating is impaired by the fact that you have many scattered loans.
A smart way to improve both your credit rating and the possibility of lower interest rates is to gather all your loans into a single private loan with one and the same bank.
Instead of having many small loans or several scattered loans with different banks, you get a larger loan and will most likely get a lower average interest rate.
It raises your credit rating and lowers your monthly cost.
5. Make a plan for your debts and repayments
The fewer and smaller loans you already have, the better your credit rating and chances of being granted a new loan at a good interest rate.
When you apply for a loan, you should therefore be able to show that you have a plan for repayment of your existing debts over time – your repayment.
Make a long-term budget where the installments are included in the calculation of your personal finances and your costs.
With such a plan, you can show the bank that you have budgeted to continuously reduce your loans. In the credit information, it is possible to see the history of your loans / credits, if the amounts decrease over time, it is considered positive.
Last but not least: Remember to be well prepared for a loan application.
By being aware of what the bank will look at when you apply for a loan, you can more easily plan your personal finances, and give a better impression of being a reliable borrower who knows his money.
What is a good credit score?
It is not possible to say exactly what is a good credit score and thus what score is required to get the application for a certain loan amount approved.
In addition to your personal score, external factors also influence. First, most lenders have different levels for which score is enough to lend money.
They have different risk tendencies. There are also external factors that can affect the risk a lender wants to take in a given situation.
To take an example of an external factor that can be decisive, we have Corona / Covid-19. A virus that affects the common man’s economy in one way or another.
Many lenders choose to be more restrictive in their lending in situations like these as their risk becomes higher.
How often is the credit score updated?
In order for a credit score to be updated and changed, some underlying value must be changed.
Common events that lead to a changed credit score are when the tax return is completely clear and approved, on your birthday or if you make any change in any company involvement.
This is how creditworthiness can affect your loans
Are you planning to buy a home? Or should you borrow money for a new car? When you apply for a loan, the bank takes a credit report on you to determine your creditworthiness.
Then the banks have different approaches when assessing loans and loans, which also affects the loan terms.
With your credit rating as a basis, you and the bank can negotiate which loan amount you will be granted and on what terms.
With the credit rating, you can also see if there are opportunities to negotiate the interest rate on existing loans. If you have a high credit rating, there is a possibility that you will receive a lower interest rate.
If you instead have a low credit rating, the lender can demand a higher interest rate from you.