What Is Your Credit Score Used For?
Very few numbers in your life matter as much as your credit score.
This single, all-important score is used to determine many things in your life, especially in the financial realm. A good credit score can open many doors, while a bad one can limit your ability to do what you want.
So what exactly is your credit score actually used for?
There are a variety of reasons someone might want to check your credit score during an application process; sometimes in unexpected situations! Read on below to find out all the different ways your credit score is used.
Applying For Credit
As the name might suggest, your credit score is used extensively when applying for new lines of credit, such as a credit card.
Your credit score is essentially a numerically expressed symbol of your credit trustworthiness. It is based on your previous credit history through all different forms of credit, and is used by potential credit providers to determine the amount of risk of defaulting on credit that you represent. The aim for all credit providers is to earn money through interest repayments and merchant fees, so someone who has a history of not paying back credit will be a warning sign for potential loss of income.
When you apply for a credit card, you will almost always be asked for your credit score. These kind of credit checks are known as “hard” checks, as they will appear on your file and actually cause a slight dip in your score. This process is an unfortunate necessary evil, but the dip is only temporary.
Do keep in mind though that credit checks for credit cards or personal loans will remain on your credit file for five years before they are expunged. It is wise not to apply for many credit cards at once, as this will show up as a string of credit enquiries which can present some concern for potential lenders as it appears as though you need a lot of credit to survive.
Applying For A Car Loan
If you are applying for a car loan in Toronto, your credit score will invariably have an impact on whether you are approved or not.
Car loans are second only to mortgages in major credit decisions that people will make throughout their lives. These are loans between you and your credit provider with the intent of purchasing a vehicle, and work much the same way as any other personal loan. Your credit score will be used to determine whether you are approved for a particular vehicle and the interest rate that will come with that loan. Generally speaking, good credit scores will attract easy approvals and low interest rates, while bad credit scores will struggle to be approved and will be given the highest interest rates.
If you have bad credit and are in need of a car loan in Toronto, choosing to go with a car loan company that specialises in bad credit car loans can save you thousands. Autoloan.ca is highly experienced in securing bad credit car loans for our customers with reputable lenders. After a year of making regular repayments, your credit score will be better and we will be able to negotiate an even better rate for you, guaranteed.
Applying For A Mortgage
Another major area where your credit score will play a huge role in your life is when you apply for a mortgage.
Mortgages tend to be the single largest and longest lived form of credit anyone takes out over the course of their lives. These are essentially personal loans from a financial institution that is used to cover the cost of purchasing property, with a downpayment and the property itself used as collateral to secure the loan.
Mortgage applications are where you will really feel any negative impacts from a poor credit score. Minimum lending requirements for mortgages tend to be exceptionally high, as they are seen as some of the risker forms of credit in the eyes of the bank. Typically, banks will only consider someone with a credit score in the high 700s or 800s for a mortgage.
If you have poor credit, all is not lost. You can repair your credit in a number of ways if you are looking to apply for a mortgage in the future. Paying off your credit cards and leveraging your credit utilisation ratio are great ways to improve your score. Taking out a bad credit car loan in Toronto is another ideal way to improve your score. Autoloan.ca specialises in supplying cars and car loans to people with all levels of credit. We negotiate with the big banks to secure you the lowest possible interest rate, and will even deliver your new car anywhere in Ontario. With regular, on time repayments on your car loan, your credit score will reap the benefits and you’ll be eligible for your dream home in no time.
Determining Your Interest Rate
Once you have been approved for a credit card, car loan, or mortgage, your credit score will then be used to determine your interest rate.
Your loan interest rate can be the difference between easily affording your repayments and struggling to make ends meet. Especially when it comes to mortgages, even a few fractions of a percent in your interest rate can mean tens of thousands of dollars over the course of your term in money owing to your creditor. Your interest rate will be determined by a variety of factors such as the prime interest rate, whether you are choosing a fixed or variable rate, and the size of your down payment.
Your credit score will also factor in to the interest rate calculation, as your lender determines what kind of risk you represent in not making your repayments. In general, people with extremely good credit scores will be offered the lowest interest rates, as credit providers compete for their business. This is because they represent low risk investments and can be relied upon to generate a return for the lender. Conversely, customers with bad credit scores will be given high interest rates, to mitigate some of the risk the lender faces in potential defaults on the loan.
When you apply for a bad credit car loan, your initial rate may be a little higher than you would ideally like to pay. However, after a year of making regular, on time repayments, your credit score will have improved and you can renegotiate your rate to a significantly lower one. This is the incentive behind the credit score system; good scores give your perks, while bad ones can hamper you.
Leasing A Property
One scenario where you might not expect your credit score to play a role is when you apply to rent a property.
Many lease applications in Toronto and Canada involve a credit score component. This helps the landlord to determine how likely the applicant is to be able to meet their rent payments based on their score. Landlords will usually request a full credit report, which lists every financial obligation an applicant has so the landlord can get a full picture of their credit situation. If they see a lot of credit owed to various lenders, that may be a warning sign that this applicant will struggle to pay rent while owing repayments to others.
On the other hand, a clean credit report can give applicants a leg up on the competition in extremely competitive markets like Toronto, as it shows the applicant will easily make rent payments and is financially responsible. Rebuilding your credit score after a few past mistakes takes some time but is ultimately one of the smartest things you can do for your future. Having a bad credit car loan that you pay off consistently and to a reputable lender is a great way to improve your credit history and reap the benefits of a higher credit score.
Applying For Certain Jobs
Your credit score isn’t done yet! One more area your score could help or hurt you is when you apply for certain employment opportunities.
While most jobs won’t ask for a credit report during the application process, jobs in the financial industry may request it for potential applicants. The thinking behind this is, if you are being hired to provide financial advice or handle other people’s money in some way, your employer likely wants to know that you are capable of following your own advice and managing your money smartly. If the employer sees a bad credit score with lots of outstanding credit, they would likely be wary of hiring the applicant as it would appear they are not the most qualified to offer advice to others on finances. Applicants with good credit scores, on the other hand, will be viewed more favourably and have a higher chance of being successful in the job hunt.
Improving your credit score is vital if you plan on working in the financial industry in the future. In some ways, having poor credit and rebuilding it will make you uniquely qualified to provide financial advice, as you will have experienced the mistakes and consequences of mismanaging your money and can advise your clients to avoid these situations. A bad credit car loan in Toronto is a great way to start your credit rebuild process. As you make repayments, your credit report will reflect this and your score will steadily increase. After a long enough period, your score will put you in equal footing with the other applicants and in with a good chance of landing your dream job.
If you are looking at ways to repair your credit, a bad credit car loan could be an ideal solution for you. Contact Autoloan.ca today and let us get you into a car you’ll love at a rate you can’t beat.