credit score

Struggling with the financial crunch? Need to take up a loan? Looking for the right loan deal by the right lender? Well shopping around for any type of loan before applying is always a good idea, but that doesn’t mean you should apply for every loan offer that comes your way. Every time you apply for a loan, the lender does a hard credit inquiry and how it affects your credit varies from different credit scoring models.

If you don’t have any idea about this already, you must know that having a good credit score is much more important than having a lot of cash. Many people don’t leave with much cash after they pay their monthly expenses, as they live their life paycheck-to-paycheck. To get a loan with a better deal, you need to have a good credit score. 

What is a credit score?

A credit score is a statistical number that evaluates a customer’s creditworthiness. It is based on the credit history of a person. Ranges from 300 to 850 and your credit score is calculated using FICO. It was created by Fair, Isaac Company. The higher the credit score, the higher are the chances to get a loan at the best rate, and also the person is considered financially trustworthy. 

  • A credit score is a three-digit number that represents the likelihood you will pay your bills on time
  • There are different forms of credit scores and scoring models
  • Higher credit scores result in more favorable credit terms

Highlights:

How credit scores are calculated? Credit scores are calculated using the information in your credit reports like your payment history, the amount of debt you have, and the length of your credit history. Higher scores of a person make potential lenders and creditors more confident when evaluating a request for credit.

Here is a general look at credit score ranges:

  • 300-579: Poor
  • 580-669: Fair
  • 670-739: Good
  • 740-799: Very good
  • 800-850: Excellent

There are many different scoring models, and some use your income when calculating credit scores. Credit scores are used by potential lenders and creditors, such as banks, credit card companies, or car dealerships, as one most important parameters for deciding whether to offer you a payday loan or a credit card.

Why credit scores are so important?

Higher credit scores generally receive more flattering credit terms, which convert into lower payments and less paid interest over the life of the account. Everyone’s financial situation is different. Therefore, different lenders have different criteria when it comes to granting credit. The most common factor that every lender used to consider while granting credit is your source of income. 

Credit scores may vary according to the scoring model used, and also based on which credit bureau delivers the credit report used for the data. It is likely possible that not all creditors report to all three nationwide credit bureaus namely Equifax, Experian, and TransUnion. Some may report to only two, one, or none at all. In addition, lenders may also use a blended credit score from the three major credit bureaus.

When will shopping around for a payday loan affect my credit score?

While submitting your personal and financial details as part of a payday loan application will result in a hard inquiry and it will make a mark on your credit report. While applying for a payday loan you need to provide your personal information, including your name, physical address, contact number, email address, income proof, and more to look at your credit report and list the inquiry. Well to get payday loan quotes and for pre-approvals, a soft inquiry happens by the lenders which don’t affect your credit, though you need to check this with the lender.

What’s the difference between a soft and hard credit inquiry?

A soft credit inquiry is used for pre-approvals and doesn’t affect your credit score. It gives a surface-level look at your credit to the creditors, without digging into your payment history or credit use.

On the other hand, a hard credit inquiry usually happens when you apply for a payday loan application or a credit card. Each hard credit inquiry typically drops your score by five or so points, though it varies.

It has been advised that you should do plenty of shopping and research around before taking out a personal or home loan. By doing that, you are ensuring that can find the best value product that fits your needs. However, it is important for you to know that multiple hard inquiries listed on your credit report in a short span of time could negatively affect your credit score.

How many inquiries are too many?

There is no specific number, but generally, one credit inquiry every 3 to 6 months is not considered to be risky behavior by lenders, and that doesn’t affect your credit score too much. Multiple factors determine how many inquiries will affect your score, including the length of your credit history and how many accounts you have. You need to keep in mind that hard credit inquiries remain on your credit report for 3 years.

It is not generally a good idea to apply to multiple lenders at once. When you apply to several lenders, every payday loan application will appear on your credit report and this can be accessed by any lender or financial institution you do business with. Multiple loan applications signify how desperately you are in need of cash and this could portray you in a negative manner in front of the creditor. 

It is a much better idea to do good research and make careful comparisons first and only then applies for a loan. Once you have picked the right payday loan for your needs, follow the loan applying process and get the approved cash right into your checking account. 

Will multiple payday loan applications affect my credit rating?

The good news is that applying to multiple lenders won’t have a huge impact on your credit rating. It is also true that multiple applications don’t look great on your credit history, but you have not done anything that suggests you won’t be able to repay a payday loan. There are some major things that could negatively impact your credit rating such as missing repayments or late repayments on your loan installments or your credit card, defaulting on payday loans, or filing for bankruptcy. All of these are indicators that you have not been able to repay your debts. If any of these have happened to you in the past, you can still able to improve your credit score by taking certain actions.

Jason Caitlin is a senior financial advisor at Payday Castle with an acumen for finance. He helping individuals and families achieve their financial planning goals and providing advice on Investment Planning.
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