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When you apply for credit, whether it’s a mortgage, a mobile phone contract, a short- to medium-term loan or a credit card, the lender needs to know whether you can comfortably manage your repayments. But what kind of information do lenders need? They’ll always draw on information from one or more of the main credit agencies, Experian, CallCredit or Equifax, who calculate a credit score based on your current financial situation and your credit history in the last six years. They may also look for additional information on your income, your outgoings and any existing loans, as well as how well you’ve managed debt in the past, although the type of information they will look for largely depends on the type of credit you are applying for. This is reflected in the forms they’ll ask you to complete in the application process.
When it comes to applying for loans for personal finance reasons, a lender is more likely to want to understand your reasons for needing the loan. These reasons, coupled with your current financial situation and credit history, will help them to decide whether or not they can lend to you and will help them determine how much, for what length of time and at what interest rate. Even if you have a bad credit rating, it isn’t impossible to be granted a loan. In fact, loans for bad credit are considered and often granted, in the form of unsecured or guarantor loans. Even so, it is always a good idea to check and make sure your credit rating is not any worse than it could be.
The best way to go about this is to obtain your credit file from one of the three main credit reference agencies. Although the credit reference agencies calculate their scores from the same information, their files may differ, so if you have recently been refused credit, ask the lender which credit reference agency they used so that you know you are looking at the same details they used when they made their decision. Make sure any inaccuracies or out-of-date information are changed or removed. Simple things such as an out-of-date address or not being on the electoral roll can have an adverse effect on your credit rating, as can dormant or unused credit cards and bank accounts. If you have a financial relationship with an individual who has a bad credit rating, this can drag yours down, too, so checking their credit file is useful as well. Doing these things can have an immediate positive effect on your credit rating and can make all the difference.
A bad credit rating caused by missed payments, a default on a loan, a house repossession, bankruptcy or other court judgements in the past can’t be amended this way, and lenders may be hesitant to approve a loan application of a potential customer who has a history of being unable to repay their debts. But there are other ways of securing bad credit personal loans. For example, the lender may ask for a guarantor – someone who will sign the credit agreement to confirm that they will repay the debts on your behalf if you can’t. The lender will also need to perform credit checks on the guarantor to ensure that they are able to do so.
When faced with having your application for credit turned down, it’s important not to go applying to other lenders straight away. The number of searches made on your credit file by prospective lenders indicates prior refusals and can result in driving your credit score down even further. Check your credit file and do whatever you can to make it the best that it can be.