If you have applied for a loan and you have been declined, it is likely that your credit score was a factor in the decision. Credit scores are used every time a lender considers whether or not to approve a loan application however many borrowers are confused about what a credit score actually is.
That’s why, in this article, LoanTube team explain what a credit score is, how lender use them when deciding, and how you can make your credit score better.
What is a Credit Score?
Your credit score is a number, which gives lenders an indication on how reliable you are at repaying debts and at paying your bills on time. Your credit score is normally calculated based on three below-mentioned factors:
- The information on your credit report
- Your application details
- All of the data that the lender already has about you (if they have loaned to you before)
The information on your credit report contains all of your previous loan applications, whether you paid off those loans, and how reliably you made the payments.
There are three Credit Reference Agencies in the UK. These companies are the only organisations, which generate credit scores and each of them has their own way of calculating the credit score. This means that your score will be different depending on the agency the lender uses.
These three Credit Reference Agencies are Experian, Equifax, and CallCredit.
What is a Credit Score Used for?
Loan providers check your credit score when they are deciding whether or not to approve your loan application. The higher your score, the more likely it is that you will receive the loan. This is because your score indicates that you have a track record of paying off your loans and meeting other bills in full and on time.
It is worth mentioning that your credit score is only a part of the loan provider’s decision-making process. They also need to consider how much money you are hoping to borrow, how long you will have to repay it, as well as your current financial situation.
How to Check your Credit Score
Before you apply for a loan, it can be a good idea to check your credit score. This will give you a better idea of how likely your application is to be accepted by the lender. It can also give you an indication of how much credit building you need to do for the future.
Each credit reference agency allows you to check your credit score online for free. You could pay £2 for full access to your credit report – but the only real difference between the two services is that the £2 version means that you will be sent a paper copy to your address.
To find out what your credit score is, simply visit any of the Credit Reference Agencies’ websites. However, if you need a short-term loan right now, don’t worry. Each lender has their own criteria that they use when they are deciding whether or not to approve a loan so we will only approach the lenders who are the most appropriate options for your needs.
How to Build your Credit Score
Because having a good credit score can help improve your chances of getting a loan, building your credit score is important. Here are some of the best ways you can do this:
Pay off your debts
Before you apply for any new credit, you should try to eliminate any outstanding debt you might have.
The reason this is so important is that some lenders might think that you are using their loan to pay off your existing debts. Some lenders are fine with this and they offer something called “debt consolidation loans”.
Other lenders don’t like it. If you approached a lender who doesn’t offer debt consolidation loans, they might become suspicious that you’d use a loan they provide you with for that reason. This could make them worry that you won’t be able to pay them back – even if that isn’t the case.
Different lenders feel comfortable with different levels of debt. Our computer system only pairs you up with the lenders happy with your overall level of debt.
Pay all of your bills on time
Paying all of your bills on time is a good way to show loan providers that you can effectively manage your finances. Your phone line and your internet bills are normally the best way to start. The more consistently you can pay these bills, the higher your credit score will rise.
Keep your credit card balances low
Lenders will look at your “balance to limit ratio”. This is worked out by looking at the difference between the amount of credit that you can borrow and the amount that you are actually taking out.
The best way to do this is by only withdrawing 30% of the credit that you are entitled to. If you always max out your available credit, then the lender may think that you won’t be able to repay your loan.
Make sure that there aren’t any mistakes on your file
If you are doing a lot of hard work to increase your credit score, you don’t want to be let down by a mistake on your file. Even being registered at the wrong address can lower your credit score. If you do get a copy of your credit report, be sure to go through it to find if there are any mistakes and contact the credit reference agencies to correct it.
Register on the electoral roll
Registering to vote will make applying for credit a lot easier. This is one of the first things that loan providers look for when they are reviewing your application. The reason this is so important is because it gives them a reliable address for you.
Don’t apply for multiple loans at once
Each time you make a full application for a loan, each lender will be able to see this on your credit file. If you have applied for multiple loans at once, it could give a lender the impression that you are constantly being rejected – even if you aren’t. For this reason, you should only make one application at a time. Applying through LoanTube means you don’t have to submit dozens of applications individually to each lender to get your loan decision.
What you Need to Know About Making a Loan Application Through LoanTube
At LoanTube, we work to help people find the cheapest loan possible, even borrowers with poor credit ratings.
How do we do this? When we become partners with a lender, one of the first things they do is to send us a list of the types of borrowers they would like to work with. You might be just the type of borrower one lender is looking for but another might not consider you. Our job is to pair you with the right lenders based on the information you give us.
For your peace of mind, we’re licensed by and registered with the Financial Conduct Authority as are all the lenders we work with.
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