Most lenders will take some time to approve an application for a loan or a financial product. They need to make sure that they are lending money or giving credit to those people most likely to pay them back. To work this out they access the individual's credit record and use it to build a credit score. This tells them how much of a risk it will be to deal with the individual.
How Does a Credit Score Affect Lending Approval?
Any decisions made by lenders on approval or interest rates may well depend on how high an individual's credit score works out to be. A high credit score equals lower risk to lenders. Consumers in this position will have no problems raising credit and will attract the best rates of interest. A lower score, on the other hand, could lead to rejected applications or to higher charges.
How do Lenders Work out a Credit Score?
This process involves a lender looking at an individual's credit rating to see what is on there from both a positive and negative viewpoint. Problems that may be listed on the record will lower the potential score. Good financial management and responsible behaviour will increase it.
Although some countries are relatively open about how credit scores are assessed, it can be hard to pin down exactly how this works in the UK. Lenders can use a variety of scoring methods and systems and they don't tend to advertise the way that they make their calculations. Also, each lender may grade scores at different levels. So, where one lender may reject an application at a certain level, the next may approve it.
In general terms, however, lenders usually look for the following issues when they score an individual:
- How long the individual has had financial accounts listed on their record and how many accounts they currently have on the go.
- Examples of previous financial difficulties (i.e. missed and/or late payments).
- Evidence of significant debt problems (i.e. defaults, CCJs, IVAs and bankruptcies).
- A healthy debt/credit limit ratio (i.e. how much the individual is in debt and how much of their credit limits are remaining).
- How much new application activity is listed on the record (i.e. how many new accounts have been opened or applications made for new financial products/accounts in the last few months).
Although there is no 100% accurate way of knowing what score any lender will give, it is thought that most will look favourably on those that manage their finances well and keep well within credit limits. Many will mark down those that have had issues or look like they may have them in the future.
How can Consumers Check Their Credit Score?
Those thinking about applying for a financial product or those that have been turned down/offered higher than average interest rates may want to:
- Check their credit record to spot potential hot spots: The major credit agencies (Experian, Equifax and Callcredit) offer free online trials that allow individuals to take a look at their credit record. It is also possible to pay a small fee to have a record sent out.
- Get an estimated credit score: Most of the credit agencies and some financial websites will allow consumers to see an estimate of their own credit score. Whilst this cannot replicate a lender's process exactly, it may still give a useful idea of where they stand.
If there are signs that their record may throw up a negative credit score then consumers could spend some time cleaning it up or improving it. If, for example, a check shows that there are errors or areas that can be made to look better then the individual may want to see if they can improve their credit record before they make another application.
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