Apply for any form of consumer credit and you can bet the lender will take a good look at your credit score and history. Both will influence the lender’s approval decision. And if approved, your credit score and history will affect everything from interest rates to the terms of your loan.
Credit score and history play a different role in the arena of hard money and bridge loans. They are not so important in terms of approval, but they still affect rates and terms. Therefore, it is important to maintain a good credit score and history if you have any intention of borrowing for any purpose.
Credit Score Explained
Your credit score is a numerical representation of the amount of risk you pose to lenders. Contrary to what most people think, credit score does not represent your ability to pay your bills. It represents the likelihood that you will default within the first few months of obtaining new credit. The lower the score, the greater the chances of default.
Credit scores are derived through complicated mathematical equations that account for a variety of factors. In the U.S., there are dozens of different credit score types. The most commonly used for consumer lending is known as FICO. It was originally developed in 1958 by a California company known as Fair, Isaac, and Company.
Most of the data that goes into calculating a credit score is obtained from credit reports. As such, your credit history plays a role in determining your credit score.
Credit History Explained
Credit history is exactly what its name implies: a history of a consumer’s use of credit. It tells lenders a lot about your current and past borrowing history. It tells them how much you borrowed and the types of credit instruments you have utilized. It tells them whether or not you pay your bills on time. It even tells them how much outstanding debt you have compared to the amount of credit made available to you.
The most important thing about credit history is that it shows whether or not you have a history of paying back what you borrow. A poor history will affect your ability to borrow, the rates and terms you are eligible for, and more.
Your Credit and Consumer Lending
The totality of your credit profile affects your ability to obtain consumer credit instruments. In other words, it affects your ability to get personal loans, credit cards, car loans, and even a mortgage. The worse your credit is, the harder it is to obtain credit. And when you do get approved, you will pay the highest interest rates and get the least desirable terms.
Your Credit and Business Lending
Your credit also affects business lending. If you were to apply for a small business loan, the lender would look at your credit the same way a mortgage lender would. Your approval, as well as rates and terms, would be affected by the strength of your credit score and history.
One exception to the rule is hard money. Private lenders like Salt Lake City’s Actium Partners only look at credit score and history when determining rates and terms. As for approval, it’s based almost entirely on collateral. Therefore, your credit history and score are not as important when borrowing hard money. But it still influences how much you pay for the privilege of borrowing.
What is the lesson here? A good credit score and history will help you maximize your use of credit. Likewise, a poor credit score and history will make it harder for you to borrow, especially at the best rates and terms.