Banks and Building Societies have become increasingly choosy about who they lend money to, which means that applying for a loan may not be as straightforward as you would like. This is where your personal credit history and your credit rating play an important part – but do you know anything about yours? Unfortunately, many people only find out that there’s a problem with their credit history and that they have a low credit score when their loan application is turned down.
What information is held on your credit file?
While lenders look at a range of factors when they consider your loan application, the most important reference source is your credit file. There are 3 main credit reference agencies in the UK – Equifax, Experian and CallCredit – whose job it is to collect data about your financial behaviour and history including mortgage payments, credit cards and other loans. When you apply for a loan, this information is used to assess your creditworthiness.
Why might you have a poor credit score?
If you have a low credit score, you’ve probably had trouble paying back your debts at some point, which has left a ‘bad mark’ on your credit report. This might have happened for a number of reasons including:
- You’ve made late repayments on a loan or credit card payment
- You’ve missed repayments altogether
- You’ve been declared bankrupt or have entered into an Individual Voluntary Arrangement (IVA)
- You have a County Court Judgement (CCJ) awarded against you
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Can you still borrow money?
Be assured that if your loan application has been rejected due to a low credit score, it is not the end of the world. There are plenty of lending options out there for everyone, including some that are deliberately designed for people with difficult credit histories and bad credit ratings.
It’s important to realise that lenders who offer these types of loans are likely to charge higher interest rates to make up for the higher risk of lending, but it’s still possible to find a good deal if you’re willing to do a bit of homework. Check specialist comparison sites to help you find the most affordable poor credit loan.
Generally speaking, there are two types of loan: secured and unsecured. Secured loans use a valuable possession (such as your house or your car) as collateral for the debt which you could potentially lose if you failed to make repayments – be very careful indeed before you take the risk.
Whichever type of loan you take out, you should try and repay it as quickly as possible in order to avoid expensive interest rates as much as you can.
How can you improve your credit score?
Provided you make all your repayments in full and on time, taking out a bad credit loan can really help your credit rating. It shows that you can manage your finances responsibly and that you can be trusted to repay the debt. This means that next time you need to borrow money, your credit score may well have increased to the point where you are no longer deemed a ‘bad credit’.
Working on improving your credit rating is highly recommended for everyone. It’s never too early to start managing your finances properly and to understand how your behaviour around money influences your credit score.
- Start by signing up to all 3 credit reference agencies – they all use slightly different calculations – and get free monthly updates on your credit file to help you track your progress. Noddle gives you access to your CallCredit report, ClearScore provides credit score and report data based on Equifax data, while an account with Experian lets you check your credit scores whenever you like.
- Next, make sure that you are registered on the electoral roll. Lenders use this data to verify where you live – an important sign of financial stability.
- It goes without saying that any money you borrow should be paid back on time and in full wherever possible, without any slipups that could adversely affect your credit rating.
- Try not to use up too much of your credit limit.
- It’s best not to apply for too much credit in a short space of time, or to apply for several loans at the same time. Every time you make a credit application, an official ‘hard search’ will be carried out on your file and a mark will be added to your report. If lenders see multiple applications in a short period of time, they may view you as a higher risk.
- Instead, use a quotation search (also known as a ‘soft search’) to assess the likelihood of getting a loan before you make the formal application and without any risk to your credit score.