Each time you apply for any kind of credit, the person that you have applied to will want to make sure that you are a good risk for them.
If they were to lend you money, could they be guaranteed that you would pay them back? They would not be prepared to take your word for this, they would want to be able to access some kind of ‘evidence’ that would reassure them that their money would be paid back as agreed. The check that they make is known as a ‘credit check’. Your lender will access your credit file and if they are happy with what they see, coupled with you satisfying some other criteria that they may have, they will lend you money and if they are not satisfied, they will not lend or may choose to lend at a higher rate of interest.
The information that is held on your credit file builds your credit score. There are three main credit agencies and each will ‘score’ your file in a slightly different way, so there is no overall ‘best’ credit score but the higher your score is, the better.
Your credit history will show all of your bank account details, your credit cards your mortgage or car loan and anything else relating to credit. Your lender will be able to see whether you have made payments and kept up payments to previous loans and they will also be able to see the amount of credit you have access to via credit cards and if you have any County Court Judgements. Your credit file will not show information such as salary or medical records, which is something that some people worry about. This information will help your lender to build a picture. Not all lenders are equal and it may be that one lender may refuse your application but another may not, it may also influence the rate of interest they may offer you on the loan.
Crediful says “It is recommended that you try to maintain your credit score as it is essential for any type of credit you may need in the future.”
You can keep an eye on your credit score with one of the free checks. There is confusion around this area. When a lender checks your file, there is a footprint left and this is known as a ‘hard check’. Other lenders will see that you have had a check made and if you have too many checks around the one time, lenders may consider that you have access to too much credit and may decide that you are a bad risk as the more credit you have, the more you will be required to pay off and it then comes down to affordability.
The check that you make yourself is not like that, it is a ‘soft check’ and that does not imprint on your file. You are able to check your own credit history and it is recommended that you do as mistakes can happen and entries can be made on files that are incorrect. Regular checks allow you to keep up to date with the situation. If you notice that something is incorrect, it is important that you have it corrected as soon as possible.
If however you do not have a good score or a lender has refused to lend, you may want to look at ways that you can make yourself more attractive to a lender by improving your score, but just how do you go about doing that? It can take several years, in some cases but there are steps that you can take
If you have any outstanding loans or if you pay other bills, make sure you continue to make regular steady payments within the time frame agreed. It is reassuring for a lender to see that you can make and maintain the payments.
If you live at the same address and have done so for a while, this may be a positive for you but if you have had several addresses in the last few years, this may not be helpful. A lender is looking for stability and may be concerned that he/she may have difficulty in making contact with you.
If you have old credit cards lying around, they will have a credit limit attached usually and this tells the lender that you have access to perhaps too many fund, so close any unused accounts
Make sure that your details are included on the electoral roll and they are accurate. If your name is not there, this could be a red flag for lenders
Disassociate yourself from anyone to whom you are financially linked if they have poor credit as this could impact on your score
There are cards which you can get even if you have a poor credit score. Interest rates on the cards tend to be high but used effectively, they could allow you to prove to a lender that you can manage your finances, so they may be worth considering
If you have a County Court Judgement or a failed payment history, this can repair but it may take time to do that, in the meantime do not do anything else that may harm your score further
If you do have a poor credit score, it might be tempting to take a loan with a very high rate of interest associated with it. This may not be helpful and can lead to further problems as if you miss payments on that loan, it could damage your credit score further.
Remember, with any borrowing, you have to consider your budget and what you will be able to afford for the duration of the loan. If your circumstances are likely to change, then that has to be factored into your budget. You should never borrow more than you are comfortably able to repay.