Millions of borrowers struggle to have their applications approved despite their fair credit scores, and if a lender signs off on your loan, it costs you hundreds of millions of pounds a year. Many of you are under the impression that lenders’ underhand tactics may account for taking a toll on your emotional as well as financial strength.
When you apply for a loan or a credit card, the lender examines your financial background to make sure that you are able to pay off your debt when it is due.
A credit score is a foremost factor
Credit rating is a system that every lender, financial institution and the bank uses to determine your eligibility to pay off what you want to owe. When you take out a loan, your lender will contact credit bureaus, which are Experian, Equifax and TransUnion, to request your credit report to examine the risk involved in lending you money.
Each lender follows a different threshold level for your credit scoring. The higher the score, the more creditworthy you are. Your lender will not disclose you the score but approve the application if it is above the minimum level they set.
Lenders generally follow Experian and Equifax credit rating:
|Excellent||961 – 999||800 and over|
|Very Good||881 – 960||740-799|
|Average||721 – 880||670-739|
|Poor||561 – 720||580-669|
|Very Poor||0 – 560||0-579|
Credit reference agencies record the following information on your credit report:
- The electric roll
- Account information (how you have managed borrowings)
- Public records
- Home repossessions
- Hard inquiries or searches made by previous lenders
You should periodically check your credit report to know the score so as to keep up the average rating. Request credit bureaus to provide you with a copy of your credit report. Check it has all information correct and up to date. If you feel it has mistakenly recorded a default that is out of your knowledge, you can ask the agency to rectify it. However, you cannot ask them to remove the information just because you do not want to divulge it to the lender.
The best method to build your credit is to pay off all your debts, credit card bills, utility expenses on due date. In case, the due date slips through cracks, you should clear off the dues as immediately as possible. Your lender will inform the credit bureau of default after 30 days from the scheduled repayment date.
Always remember that when you apply for a loan application, the lender runs a credit check that leaves footprints on your report. The more applications you fill out, the higher the hard inquiries will be. These inquiries pull your score. The lender will doubt that you are in hunger of taking out debt. It is usually advised that you should not fill out multiple loan applications within a short period.
Moving onto other factors that lenders consider before approving or turning down your application:
It constitutes the large proportion of your credit score. It helps your lender know about your repayment capacity. The lender will always try to know how much funds you owe currently and how efficiently you are clearing the dues. Your credit score continues to go up as long as you pay off your debts on the scheduled date. If you fail to make repayments, it will leave a record on your report that may stay for a very long time.
Make sure that you take out a debt only when you need it urgently. Studies have discovered that people borrow money even if they have sufficient savings to dip into. As long as your savings account is up, you do not need to apply for the loan. Do not take out a loan if you do not need funds urgently.
If you face difficulty paying off your dues, talk to your lender to figure out an alternative. Make sure that you do not fall behind repayment dates otherwise you are likely to face numerous rejections for long-term loans and higher interest rates for short-term loans.
It is the ratio of your outstanding credit card balance to your credit card limit. For instance, if your credit card limit is £1000 and the credit card balance is £400. The credit card utilisation ratio is 40%. The higher ratio indicates that you rely on debts for your livelihood and the chances of approval of your loan application go to almost nil.
The lower the credit card utilisation ratio, the better. The rule of thumb says that the credit utilisation ratio should not be more than 30%.
Here are some tips to maintain the credit utilisation ratio
If you have multiple credit cards, spread purchases over different cards to keep your balance lower. This strategy will not let you consume more than 30% of your limit very quickly. Remember that lenders calculate the percentage by adding up balances and limits of all cards. So you have to be careful that the utilisation ratio is not more than the standard limit even if you make purchases through all cards.
Do not close your credit card if it is idle, otherwise, it will increase your credit utilisation rate.
You should talk to your lender if they can increase the limit of your credit card.
Credit length and types of credit
The length of your credit gives your lender a clear picture of your financial obligations. If your report shows timely repayments of small loans, which are usually paid back in a lump sum within a short period, you might not get the deal at lower interest rates as the lender will have no clear idea of your creditworthiness.
If you have been managing repayments of a mortgage and instalment loans, you are likely to get the loan quickly and at lower interest rates provided your credit report does not show any default.
Even if your credit history is stellar, the lender will consider debt-to-income ratio to estimate how much funds you can borrow. You will get what you can afford, not what you quote.