Building a good credit score can be a prolonged undertaking, so it is natural to search for possibilities to speed up the process. It is often debated whether specific loan types boost credit scores.
Does the Type of Loan Matter in Building Credit Scores?
There are many different forms of loan products offered and revolving credit lines are often sighted as loan products that can boost credit scores. They are called revolving credit lines, as once a borrower has paid down on the loan, they can borrow up to the same credit limit without going through the credit approval process every time they require the same type of loan. Therefore within the start and end date of the facility, multiple cycles can be taken without further approval. Examples of these are credit cards or installment loans. Other types of loans that assist in building credit scores are car loans, mortgage loans, study loans, private loans, and much more. These extend over a much longer period enabling credit scores to be calculated based on length of time taken/payment history etc.
Can some loans perform a higher task of building a good credit score than others? Much as we may like to believe this to be true, in some cases the lender may be the determining factor. This is typically seen with loans taken from pawn shops. In this instance an item of value is exchanged with the cash value and stowed away till the owner returns to pay back the cash and once more owns the item. Items kept past the reclaim date are often auctioned off to other prospective buyers. Pawn shops do not typically report credit transactions positive or negative to credit bureaus and therefore this transaction is unable to impact credit scores of consumers. Alternatively, in the event a car loan is taken, the reverse happens when payments are made consistently within the agreed timelines. In this instance, credit scores are affected positively making the consumer attractive to other lenders.
While the types of loans and/or postpaid services are important in boosting credit scores, it remains crucial to ensure that repayments are continuously made within the agreed timelines with credit granters. It is important to remember that credit grantors vary and can operate from all sectors of the Nigerian economy. Examples of credit grantors are commercial banks, microfinance banks, finance houses, retailers offering consumer products for payments in installments, cooperatives, fintechs, staff loans from employers to name a few.
A more scientific way of boosting credit scores and becoming more eligible for loans, is to understand the factors lenders review while taking that crucial decision on who to lend to. What are these factors used in calculating credit scores?
CRC Credit Bureau provides lenders credit scores which are often used for prequalification of loan applicants and credit evaluation. When calculating the CRC Score, powered by FICO, 5 elements are considered. These elements are under constant review by credit grantors while taking credit related decisions.
- Payment history (35%): This is the most crucial element in determining your credit score and it reviews the payment history of the consumer taking into account the payment frequency based on agreements reached with the credit grantor. Making payments as and when due boosts credit scores, whilst missing payments can affect credit scores negatively.
- Amount owed (30%): This crucial scoring element is based on the overall amount owed, as well as your credit score utilization rate on revolving credit accounts. A high utilization rate may imply a difficult time handling finances. It is recommended to keep credit utilization rates below 33%.
- Length of credit history (15%): This element considers the length of time the consumer has had diverse credit accounts. In this instance the longer the credit history the more positive effect it will have on credit scores of consumers.
- Credit Mix (10%): This element considers the different types of credit enjoyed. Showing a diverse blend of credit facilities or accounts, such as installment loans, should assist in boosting scores in this element. This does not suggest a wide range of credit types is required, rather a healthy mix enhancing the quality of life.
- Pursuit of New Credit (10%): The impact of the pursuit of new credit on credit scores can be bittersweet. Therefore, it is important to note that each time one applies for a new credit facility, lenders run a hard enquiry on the account. A hard enquiry refers to a record/notation that a creditor or lender has run a credit check to decide whether to grant a loan or the type of postpaid service to the consumer. Hard inquiries stay on your credit reports for up to 2 years and can negatively impact credit scores. Given the potential harm, apply for loans only when necessary, or avoid applying for multiple credit accounts in a short period of time thereby eliminating as many hard enquiries as possible.
There is no time like the present to take charge of your credit scores. Take the first step, request for your credit score and see yourself as lenders see you. Only then can positive changes be made towards boosting your credit scores.
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