Once you have applied for a loan, many lenders base their decision on your eligibility thanks to the score they receive from a credit bureau, such as Experian. If you have a higher credit score, you will be able to access credit more easily and are more likely to pay a lower interest rate. To help you prepare for your loan application, we explain how your credit score influences your eligibility for a credit score below.
Credit scores introduced
The business that you’re applying for credit from wants to know if you can pay the money back. As they don’t have this information available to them, they work with credit bureaus that provide it to them in the form of a credit score. It’s the job of a credit bureau to accumulate your financial information and provide lenders with a representative picture of your credit history. This, in turn, allows lenders to make a decision about whether to approve your loan application. Before making their decision, the lender will surmise if you’re deemed a credit risk and use this as the basis for their decision.
How is my credit score worked out?
The methodology employed by each of the UK credit bureaus is a little different, but the premise is easy enough to understand. You are awarded points for positive actions (paying off a loan) and lose points for negative ones (defaulting on a loan). Although the bureaus use different scales, you will be ranked as very poor, poor, fair, good, or excellent. Loans for fair credit scores are easier to come by than those of poor and very poor, for instance. It’s for this reason that it’s helpful to work on your credit score and ensure you always make your repayments on time.
What credit score is required for a personal loan?
No matter your credit score, you will probably be able to access some form of credit. This means there isn’t a minimum score you should aim for. The reason that your credit score is important is that it affects the loans that are available to you. Borrowers with high credit scores will have their pick of lenders and loans and may even be able to access annual percentage rates as low as 2.8%. Loans for fair credit scores are a little more difficult to come by and are likely to have higher interest payments as a result. Borrowers who have a poor or very poor credit score will struggle to access loans full stop. They may only be able to access guarantor or payday loans, which can be super expensive and are far from ideal.
Why is your credit score important?
Lenders aren’t particularly concerned with your actual credit score, but they are interested in your credit history. They want to know how good you have been at paying credit back in the past, and they will only really deal with borrowers who they’re confident in. This is true for secured and unsecured loans, and your credit score will influence your eligibility for both.
What other options are out there?
Although your credit score is a reasonable reflection of your credit history, it doesn’t tell the full story. For example, credit scores don’t show your main income or expenditure on things, but they do indicate your loan repayments on credit card debt. Also, if you’re new to the UK, you won’t have had time to build up a credit rating, which means lenders have no idea if you’re a good or bad credit risk. As a reflection of this, many lenders are utilising Open Banking, which provides them with an accurate picture of a borrower’s current finances. This makes loans for fair credit scores much more accessible, as lenders take more criteria into account than just the score provided by a bureau.
Can you improve your credit score?
It’s possible to improve your credit score, but it often takes time. The best thing you can do is pay off your loans on time and never miss payments. You could also consider the following:
- Register on the electoral roll
- Only apply for credit when you need it
- Borrow money that you can afford to pay back
- Don’t make several credit applications in a short space of time
- Ensure you pay back the money over the full loan term
- Don’t use all of your available lines of credit
Hopefully, you can now see why your credit score is so important when it comes to applying for loans. Whether you’re looking for loans for fair credit or good credit, you can check out Koyo Loans’ unsecured personal loans to find out how they use Open Banking software to review your current financial circumstances. 27.9 % APR Representative.