We all know that black marks on your credit file automatically make it harder for you to get a loan.
Black marks include overdue account listings (also called defaults), court actions (paid or unpaid), repayment history indicators, and frequent, recent loan application inquiries. All of these black marks will negatively impact your credit score. What we don’t know is that there are some other listings on a credit file that will also affect your ability to get credit. These listings are inquiries or credit contracts with certain types of credit providers. These listings are a BIG. RED. FLAG. to prospective lenders.
Payday lenders are the biggest red flag on a credit file. Payday lenders will loan you small amounts of money quickly at very high interest rates (just think Nimble), usually because you have a short-term cash crisis. We have probably all read about cases where this short-term cash crisis becomes a long-term cash crisis – where the interest rates and fees are so high that you can never quite pay back the loan, and have to keep accessing new payday loans to survive.
If a prospective lender sees a payday loan on your credit file, they will likely reject your loan application. This is because they see a payday loan as indicative of you being under financial pressure. Lenders’ assessment systems are built by modelling actual customer data, and if a particular lender’s experience is that customers who take out payday loans are more likely to default on their loans, they will reject people who have payday loans listed on their credit file.
Another red flag for lenders are inquiry listings made by credit repair companies. These usually come about after you see an ad for credit repair and call the company. The credit repair company offers to get you a copy of your credit file – “for free” – but the catch is that by the time you receive the credit file, there is already an inquiry listing on your file mentioning the name of the credit repair company. These types of listings are not favourable to you in terms of lenders’ credit scoring for the same reasons that payday lenders’ inquiry listings are not favourable. In other words, that “free” credit file might end up costing you a low-interest loan.
Apply for finance with reputable lenders to avoid unwanted inquiry listings and credit contracts appearing on your credit file. If a credit repair company offers a free credit file, ask them if it will leave an inquiry listing on your file, with their name on it. Look for credit repair companies that do not leave a footprint, and will put you into a better position to get a low interest loan after dealing with them.