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 circumstances (such as whether you are on 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 smack 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 lousy debt such as Individual Voluntary Arrangements (IVA), County Court Judgments (CCJ’s) or are discharged bankrupt.
All these nuggets of information enable a lender to see how credit-worthy you are and decide whether to lend to you and at what interest rate – or to decline your application.
What is bad credit?
If, after looking at your credit history, the lender refuses your 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 Call Credit, Experian, and Equifax, and getting a copy of your file should cost less than five pounds.
Once you have a copy, you can check that all the information on the file is correct and, if not, take steps to correct it. You can also look to improve your credit score if you decide to work with a credit repair service.
Can you get credit card or loan with bad credit?
Not necessarily. Bad credit payday loans, bad credit car finance, and other lending methods exist for people with a poor credit history.
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 previously experienced financial difficulties.
The latter may offer you credit but at a higher interest rate than expected. These are known as bad credit loans, and the higher interest rate reflects that the lender is taking on more 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 essential 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.