Also known as a credit rating, a credit score is a unique calculation assigned to you based on your current and past (6 years worth) financial and personal status.
When you apply for credit (such as a loan, mortgage or credit card etc.), the potential lender or broker will calculate your credit score in a number of ways, looking at your personal circumstances (such as whether you are the electoral roll, whether you are employed, how long you have lived at your current address etc.) and your financial status to determine:
- whether your past financial history demonstrates that you are someone who pays all the bills on time – or are likely to miss or make payments late;
- if the credit you are applying for is affordable. The lender will look at your existing credit commitments to see if taking further credit will make you financially over-stretched;
- how much additional credit is available to you that you haven’t already used. For example, if you have a balance of £1,500 on your credit card but the credit limit on the card is £7,000, the lender may include the unused £5,500 amount in their calculations;
- if you are financially desperate – repeated applications for credit over a short period of time smacks of financial desperation and will set off alarm bells for any potential credit provider;
- whether anyone else living at your address has a history of defaulting on payments.
A potential lender or credit broker will also look at whether you have any existing bad debt such as Individual Voluntary Arrangements (IVA’s), County Court Judgments (CCJ’s) or are a discharged bankrupt.
All these nuggets of information enable a lender to see how credit-worthy you are and make a decision as to whether to lend to you and at what interest rate – or to decline your application.
What is bad credit?
If, after having looked at your credit history, the lender refuses you credit, this could be because they feel it is not affordable, or you have a bad credit score.
If you are declined credit, the first thing you should do is to get a copy of your credit file from one of the three main agencies used by lenders and brokers in the UK. These are CallCredit, Experian and Equifax and getting a copy of your file should cost less than five pounds.
Once you have a copy, you can check all the information on the file is correct and, if not, take steps to get it corrected. There are also ways you can look to improve your credit score, too. If you decide to work with a credit repair service make sure to read the in-depth review of Sky Blue.
If I have bad credit, does that mean I cannot get a loan or credit card?
Not necessarily. Bad credit payday loans, bad credit car finance and other types of lending aimed at people with a poor credit history do exist.
Different lenders have different lending criteria, with some only accepting people with excellent or good credit histories and others – who are more sympathetic – who may consider lending to you even if you have experienced financial difficulties in the past.
The latter may offer you credit but at a higher interest rate than you expected. These are known as bad credit loans and the higher interest rate charged reflects the fact that the lender is taking on more of a risk by lending to you (due, perhaps to past missed payments on previous loans or credit you have had).
As you can see, your credit score is important when applying for any form of finance. Hopefully this short article has given you some understanding of what it is and how it affects you.