Importance of a Good Credit Score

By: Angelo Drew

People get lured by unsecured loans because they are not guaranteed with any asset. This means the borrower is free from the risk of repossession. Unsecured loans can be in the form of credit card debt, bank overdrafts and personal loans. Credit cards call for a very high interest. So, most borrowers don't rely on credit cards to fund much. Bank overdrafts allow the customer to withdraw more money than he has in his account. Banks charge a very high interest rate for this service. Moreover, not every bank account holder is entitled to it. Only a few of the customers of the banks having a long and good liaison with them are offered this service.

Personal loans, therefore, are the most accessible and cost-effective borrowing options to fund necessities. More and more lenders have entered the UK loan market and, therefore, borrowers have got more alternatives to choose from. But, for getting an unsecured personal loan that doesn't incur any risk on your home, one must have a decent credit score.

A credit score is a statistical summary of the information contained in a consumer's credit report. Credit score reflects the credit worthiness of the borrower and is determined by the timeliness of the past loan repayments. Any arrear, default, missed payment and late payment would adversely affect the credit score of the borrower. This may create problems for the borrower in getting unsecured personal loans.

The other factor that plays a significant role in determining the lender's decision is the DTI ratio of the borrower. DTI stands for Debt for consolidation. It calculates the disposable income of the borrower. This in turn reveals what amount the borrower can afford to pay as monthly instalment. DTI is calculated by dividing the income of the borrower by his expenses (that may include loans, credit card debts and other living expenditures).

Though bad credit unsecured loans are available in the market, they attract high APR and so, it's always better to have a decent credit score.

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