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Credit Score and Loan Interest Rates

What is a credit score?
A credit score is a three digit number on your credit report that states an approximate estimate of the individual’s capacity to pay his dues on time. A credit score is very necessary for getting loans in the future. This is because the loan institutions will check for your credit report and score before considering to give you a loan. Your credit report and score go a long way in helping the lenders make the decision to allot you a loan or not. The credit score is derived by applying a certain mathematical formula which is devised by the organisation issuing the credit scores.

Who refer to credit scores?
In the UK, it is the banks and the financial institutions which that look at the individual’s credit score before sanctioning a loan. After all providing a loan is a risky business and so the banks would like to make it as risk free as possible. Individuals with a good credit history certainly have a good credit score. Hence the lenders believe that the chances of the individual paying the loan on time are favorable. The credit score also enables the lenders to make a decision regarding the interest rate and the credit limit. The lending institutions in UK which consider giving loans on credit score will not give loans if the credit score is below a certain level. A particular credit scoring model should not differentiate for people of different sexes, color and creed. There are many companies in the UK who may just look at your credit score and decide whether to give you a loan or not. In the past only the major financial institutions and other lenders of finance had access to the credit score. However with a lot of pressure from the government and the consumer groups the credit score is now mentioned on the credit report and also on credit report sites.

How the scores influence interest rates?
In the UK the credit scores vary from 300 to 900 and an average score of 650 is rated as suitable for getting loans at reasonable rates and terms. The credit score affects the interest rates on the loan. A favorable credit score will attract lesser interest rates as the risk involved with the payment of the installments is lessened. If the credit score is low then it is difficult to obtain a loan. Even if the loan is obtained, then the interest rates in the loan are high as the risks associated with non payment of loan are high.

Getting loans at lesser interest rates
It is obvious from the above paragraphs that if you have a good credit score, you can obtain future loans at lesser interest rates. Hence borrowing the loan at less interest rate becomes favorable for you. Hence you should try your best to make your credit score good by paying all your dues and loans on time. In case you are not able to pay your loans or even the minimum payout to be made at the end of the month, your credit score gets severely affected.


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