If we want to get a new TV, car or house, but our funds are not enough, we usually turn to a lender. Before issuing a loan, credit institutions carefully evaluate the potential client, including clarifying the credit rating, or the forecast of the person’s ability to repay his financial obligations. The lender also takes into account the person’s income, expenses, household size, workplace and other criteria. Although a high credit rating is one of the essential factors for getting a loan, not everyone knows how it is formed, says the manager of “Inbank Latvia” Dainis Skrinda and dispels the myths prevailing in the society.
He says that in working with clients, the company has come across several incorrect ideas about how a credit rating is formed and what affects it.
“From time to time, a resident is confused as to why his request for a loan is not granted, although the person himself thinks that everything is in order with his creditworthiness. However, it should be taken into account that credit institutions, when evaluating the customer’s creditworthiness, are guided by the guidelines set by the Consumer Rights Protection Center. In addition, each credit institution develops and is guided by its own credit policy. This ensures the protection of both the client and the lender,” explains the head of “Inbank Latvia”.
In Latvia, you can check your credit history for free on the website manakreditvesture.lv, but viewing your credit score is a paid service. According to the information collected by the “Credit Information Bureau”, half of the persons with active credit obligations have a very high (25%) or high (25%) credit rating, 18% – average, 14% – bad and 17% – very bad.
“Over the past 10 to 15 years, the financial literacy of citizens has grown significantly. Borrowers are increasingly aware of the seriousness of their financial obligations and treat them more responsibly than before. At the same time, knowledge is still not enough for everyone. Data shows that a large proportion of young people between the ages of 18 and 25 have poor payment discipline. This means that young people, by borrowing recklessly, have a negative impact on their ability to borrow profitably in the future from the very beginning,” says Intars Miķelsons, executive director of “Credit Information Bureau”.
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The higher the income, the higher the credit score
As D. Skrinda explains, this is one of the most common myths, because many think that if the income is average or high, then there will be no problems with getting a loan. In fact, determining solvency takes into account not only income, but also expenses and their mutual relationship. Also, payment discipline is very important, that is, even wealthy people deliberately or unknowingly delay payments for utility bills, which can affect the credit rating.
“For example, if the client’s monthly income is 2,000 euros, but he already has to pay 700 euros every month in various loan payments, then most likely a new loan will not be granted, because the total loan burden should not exceed 30 to 40% of the total income. In addition, it should be noted that only all official revenues will be taken into account in the assessment of solvency. Therefore, not only the amount of income is important, but also the amount of existing credit obligations and the client’s personal financial habits. Our data shows that about a third of refusals are directly related to delays in existing payments, “says D. Skrinda.
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In case of difficulties, it is better not to turn to the lender
If a person with an already granted loan experiences temporary payment problems, often people do not turn to the lender and do not respond to the credit institution’s calls to contact, hoping that the situation will be resolved at some point and the payment will be made later.
This is a very important mistake, because long-term failure to resolve the situation and delayed payments can have a very significant impact on the credit rating and future borrowing opportunities. On the other hand, if you contact the lender in time and find a solution to cover the loan, either by reducing the monthly payment or extending the term, information about payment difficulties may not reach the credit register at all. Lenders do not include information about the delay in the unified database immediately after the first delay, initially trying to resolve the situation with the client. As D. Skrinda explains, credit institutions are also interested in resolving the situation in a mutually gentle and timely manner, therefore it is important to approach the credit institution and look for solutions at the first difficulties.
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It is not possible to improve the credit rating
Sometimes customers think that once they have damaged their credit rating, they will never be able to borrow again in the future. It is not at all! If a person has a stable income, repays debts over time and changes their financial habits, then the credit rating can be improved, but it will not be a quick process. Records of a person’s covered debts are kept for up to 5 years. On the other hand, if a person has been initiated into insolvency, it will be very difficult to restore the credit rating, because such information will remain in the registers for another 10 years after the end of the insolvency process.
“However, nothing is impossible! As long as the facts show that the resident has really changed his habits and got rid of various debts, there is a good chance that borrowing will be possible again after a certain period of time. Everything depends on the client’s own will and discipline,” explains the financial expert.
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To get a bigger loan, you need to take out smaller loans first
Sometimes people feel that in order to qualify for a larger loan, for example, to buy a house or a car, they need to take out smaller loans first and repay them on time to build a positive credit history. D. Skrinda denies the need for such action, reminding that a loan should be taken only when it is really necessary.
“People who have no entries in their credit history, i.e. they have no active credit obligations, nor contracts with utility service providers, are evaluated positively and there is no need to take any additional actions to improve their credit rating. Rather, it means that a person has been able to manage their finances so far that a loan has not been necessary. Also in databases, the credit rating in such a situation will most likely appear as good, despite the fact that there are no entries in the credit history,” says D. Skrinda.
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Applying for a loan in several places will worsen your credit rating
The principles of creating a credit rating differ in different countries and indeed, for example, the number of credit rating requests from different institutions in the USA can lower the credit rating, but this is not the case in Latvia. If you want to take out a loan, comparing offers between competitors is safe and even recommended. In addition manakreditvesture.lv you can find out which authorities have requested information about you in the last 12 months.
SIA “Inbank Latvia”
