Approximately 30% of people in the UK are at risk of not getting the best deals when it comes to loans because of their credit rating. The lower your credit rating, the lower your chances of being approved. Thankfully, there are things you can do to improve both your credit score and the likelihood your loan application will be approved.
Why is your credit score so important?
Lenders look at your credit score before deciding whether to approve a loan application. They will generally use one of three main credit reference agencies (Transunion, Equifax or Experian), each of which looks at your credit history to produce a score that lenders translate into a level of risk. The higher your risk level, the less likely they are to approve your loan.
Before you apply for a loan, find out what your credit score is. Each of the three main credit reference agencies is required to provide you with your credit score for free.
Your score is calculated based on:
- Your level of debt and available credit.
- Your repayment history (have you paid on time and at least the minimum amount required?).
- Whether you have declared bankruptcy or entered into an Individual Voluntary Arrangement, Debt Relief Order or Debt Management Plan.
- If you have any County Court Judgements against your name.
Young people or those who have recently moved to the country may have a poor credit rating because they haven’t had a chance to build a credit history, not because they have missed payments etc. However, the result – finding it hard to get approved for a loan, for example – will be the same.
Bad credit loans
One of the easiest ways to get a loan if you have poor credit is to apply for a bad credit loan, a commonly used name for a loan with a higher than average rate of interest. Bad credit loans may or may not require a guarantor, who co-sign your loan agreement and take responsibility for repayment if you are unable to meet your obligations.
Bad credit loans can be secured or unsecured loans. With secured loans, you will need to borrow against your assets, e.g. your home, land or a car. There is a risk to secured loans as your property could be at risk if you can’t make your repayments, but you may be able to get a better rate of interest when compared to unsecured loans.
Credit Union loans
Credit Unions are non-profit organisations which provide low-interest loans (at no more than 3% interest) to people who have poor credit, are on benefits or who have low incomes. They offer small loans, as low as £50, which can be paid back weekly. They are a great option if you are looking for money to tide you over till payday (especially when compared to payday loans for example) but may not work if you need to borrow a larger sum.
You need to be a member of a credit union before you can apply for a loan and will need to open a savings account with them as part of their aims and objectives are to encourage people to save regularly.
Applying for a loan
Before you apply for a loan, you can ‘test’ your chances of being approved by carrying out soft searches using comparison sites such as here on Lending Expert. These searches don’t get reported on your credit file, a plus because multiple applications can have a negative impact on your credit score and will give you a good idea not only what your chances of being approved are but also what your monthly payments will be.
Don’t make multiple applications at the same time as this will also have a negative impact on your chances of being approved. After you have made an application, if you are turned down, wait at least a month before applying for another loan.
Improve your chances of getting a loan by improving your credit rating
If you can hold off on applying for a loan, you could get a better deal by improving your credit score. There are a number of ways to do this, including the following five, all of which can quickly improve your credit rating:
- 1. Make sure you are on the electoral roll; lenders use this as a way to verify your home address, complete identify checks and confirm you aren’t money laundering.
- 2. Check your credit report for errors. If you find any, contact the relevant credit reference agency immediately to have the errors corrected. You might also need to speak to your lender or the Financial Ombudsman.
- 3. Unlink yourself financially from ex-partners or others where you have had joint accounts; their bad credit score can affect your credit rating.
- 4. Catch up on any late payments before applying for more credit. Late payments stay on your credit report for six years but the older they are, the less impact they have on a lender’s decision.
- 5. Close inactive accounts. If you don’t, they show up as available credit and lenders might think you could use this, putting your ability to make repayments to them at risk.
It can take time to move from a poor to an excellent credit rating. However, even small improvements can make all the difference when you apply for a loan. Check your credit report monthly as you work to rebuild your credit and run soft searches following any improvements in your score to see if this makes a difference to the loans you could be offered.