What does credit history have to do with taking out a loan?

What does credit history have to do with taking out a loan?

What does credit history have to do with taking out a loan?

What does credit history have to do with taking out a loan?

Your credit history plays a crucial part when it comes to your eligibility for loans, credit cards, and even property rental.

Your credit report can be a deciding factor for some lenders in making the decision of whether to accept or reject your application for credit.

Having a good credit history on your credit report, showing that you’ve paid back credit such as loans and credit cards on time, can suggest to lenders that you are financially responsible and therefore more likely to pay them back too.

A poor credit history, with late or missing payments, may be viewed less favourably by some lenders and means you could have a higher chance of having your application declined. To help give you an idea of how it all works, below are some of the key facts surrounding your credit file and how it relates to you getting a loan.

What is a credit file?

A credit file is a record of your history regarding applications for credit and repaying things such as loans, credit cards and bills. It lists your financial history, and includes information on who you’ve borrowed from and even whether you’ve been made bankrupt, etc.

The information is collected by credit reference agencies such as Experian and Equifax, who are given this information by companies such as lenders, banks, credit card companies, and utility companies. Credit reference agencies will give your credit report a score, called a credit score, which is a quick way to tell how positive or negative your credit history is.

This combined information allows lenders to get a financial snapshot of a person, and find out how reliable they are when it comes to paying loans and bills, based on how they have behaved in the past.

Each time you apply for a loan or another form of credit, the lender may perform a credit check to assess your credit file, and will then make a decision based on what they find.

How can I improve my credit score?

While improving your credit score can seem complex and confusing, there are several steps you can take to do this, even if you have never previously had any form of credit. Find out more at the money advice service

• Registering for the electoral roll

Registering to vote is a simple way of building up your credit score, and shows lenders that you are officially registered to a specific address. Lenders knowing that you reside at a permanent address and are not moving around all the time indicates your stability. Registering is simple and can be done on the gov.uk site.

• Make timely repayments

Paying back your financial commitments on time without missing any payments has a positive impact on your credit score, as it shows lenders you are responsible. This not only applies to things such as loans and credit cards, but mobile phone bills, and utility bills, etc.

• Keep your credit file up to date

moneysavingexpert.com recommended you check your credit file regularly to ensure it’s up to date. You may have closed a credit card account, paid back a loan, or switched to a new energy supplier, but sometimes these accounts can still show as open on your file.

What can negatively impact my credit score?

There are several things that can be damaging to your score. And, although some of these factors may be due to circumstance and not easily fixed, others are things that you can do something about.

• Multiple applications

If you apply for credit multiple times in a short space of time, it can appear to lenders that you are struggling financially. This may not give lenders much confidence in your ability to manage money and pay them back, therefore may negatively impact your application.

• Financial ties

If you’re financially tied to a partner, friend, or relative with something like a joint mortgage, shared bank account, or any other form of credit, then their credit rating can impact on you. If you have an ex-partner who you no longer have ties with, separating any accounts you have with them may influence your credit score. You can do this by sending a notice of disassociation to credit agencies like Equifax or Experian.

• Employment status

Lenders may use your employment status and profession as part of their credit scoring process. For example, someone who is unemployed or on a zero-hour contract may not be viewed as favourably as a person who has been in a permanent full-time position for years.

• Bankruptcy and IVAs

Being declared bankrupt or signing up to an IVA (Individual Voluntary Arrangement) will almost certainly impact on your credit score and ability to borrow money.

County Court Judgements

A County Court Judgement (CCJ) is issued when you have not been able to repay a debt and the lender has taken the matter to court to get an order against you requiring you to pay. A CCJ will affect your credit score and potentially reduce your options when it comes to potential lenders.

 When it comes to taking out a loan, your credit history plays a part in whether your application is accepted or declined. However, being armed with the right knowledge can enable you to go about improving your credit score and in turn, increase the range of products available to you and your chances of approval later down the line.

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