Credit score might be a term you've heard before – though it can be a little confusing as to what it means. Credit checks, poor credit and credit ratings may all be phrases that cause alarm in today's financially focused world, but with a little research and forward planning, they needn't be cause for concern.
Your credit score, put simply, dictates how likely you are to be accepted for any kind of borrowing - be it a mortgage or personal loan, or even something day-to-day like a phone contract or a credit card. Your score is calculated based on your credit history and tells lenders how likely you are to be able to pay them back, based on whether you’ve been able to meet other similar arrangements in the past.
High or low, a credit score can affect your chances of being accepted for any kind of loan agreement, as well as the interest rates and repayment plans that come with being accepted.
What is a credit score?
A credit score is essentially a record of how well you’ve managed your finances and borrowing in the past. Lenders use it to determine whether you would be able to pay them back based on previous agreements. Those with a high score are considered less of a risk and are more likely to be accepted for a loan. However, even if you have a poor score, with a little management and planning, you can soon get it back on track.
Your credit score is affected by several factors:
- Current debts. How much you owe right now (if anything) and how well you’ve managed repayments.
- Credit allowance. Whether you’ve maxed out any credit cards and how much of your available credit you’ve used.
- Public information. Whether you’ve been served with CCJs, are a registered voter, and other information on record.
- Previous applications. Whether you’ve made attempts to apply for credit before and how successful these have been.
How does your credit score affect your borrowing conditions?
Your credit score affects whether you’re likely to be accepted for any kind of borrowing. There are three main factors that having a low credit score will affect:
- Interest rates. A low score means you’ll be deemed a risk to lenders and likely incur higher interest rates as part of any repayment plan.
- Lower credit limit. Lenders may offer you less than you hoped or limit the amount you can potentially borrow. This can be a lower maximum amount on a credit card, or a decreased financial offering when it comes to lending to buy a house.
- Refused application. A low credit score could mean lenders decide not to offer you the loan you originally applied for.
However, even if you are refused borrowing on the loan you initially applied for, it doesn’t always mean you won’t be able to borrow at all. Speak to your lender and there’s a chance they’ll offer you different terms with clauses and conditions that are more suited to your financial situation.
Can you get a loan with a bad credit score?
Having a low score doesn’t make it impossible to borrow when you need it. Though lenders are likely to deem you more of a financial risk, you can still agree terms in some cases.
However, it’s worth bearing in mind that you’ll probably face higher interest rates or decreased limits when it comes to agreeing a maximum borrowing amount. You should be certain that you can afford the repayments to cover these higher fees, and that borrowing less won’t make you worse off.
Some lenders may also require a guarantor. A guarantor is someone else named in your application who will foot the costs of repaying the loan if you don’t keep up with payments. A guarantor is usually a parent, spouse, relative or friend who can afford to make payments if you can’t.
You must get the guarantor’s permission beforehand, and give serious thought as to whether they will be able to meet the payment costs themselves.
Does your credit score affect interest rates?
A better credit score means you’re less of a risk to lenders and therefore likely to be offered lower interest rates and repayment options. Likewise, a bad credit score will incur higher fees, meaning you’ll likely be paying back more in the long term and every month. Consider whether you’ll be able to meet these costs over the duration of your loan repayment before you apply.
Interest rates are variable too. This means that, unless you’ve agreed a fixed rate, they can differ over the course of your repayment plan, and won’t always be the same as when you applied. Rates can also change during the course of your loan, based on how well you’re managing to pay it back. Meet payments and improve your credit score and you’re more likely to owe less in the long-term.
How to improve your borrowing profile
Even if you start off with a poor credit score, with the right management and budgeting, it’s possible to improve your borrowing profile. Depending on your financial situation, raising the figures on your credit rating will take time, but there are a few ways in which you can improve your prospects:
- Correcting info. Make sure the information you’ve given the lender is up to date. This can include current addresses, bank details and employment history.
- Register to vote. It may sound unrelated, but whether or not you’re on the electoral register can alter your credit score. Get online and register on the electoral roll.
- Try to reduce spending. Having a healthy budget is important, not just for the ways in which your spending affects your credit rating. Reduce the amount you use your credit card and pay by debit instead.
- Pay on time. It’s important that you pay on time. Whatever the amount you’ve agreed to pay back on any current credit agreements are, make sure you can pay it on time, as this will contribute to an improved credit rating.
Find out more about bad credit loans, and how they can help you get your financial situation on track if you’ve been refused a loan elsewhere.