How your credit score affects your ability to borrow

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Banks and credit card companies use a variety of information to give you a credit score, which determines whether they will lend to you and on what terms.

Credit scores are based on;

  • Information you provide on your application form

  • Information on previous accounts or applications you've made with lenders

  • Your credit report at one or more credit reference agencies – the three main CRAs are Experian, Equifax and TransUnion UK (formerly Call Credit)

What does having a low credit score mean for you?

  • You may be charged higher interest rates on credit and loans

  • You may be given smaller credit limits

  • You may not have credit or loan applications accepted

Remember, lenders doesn’t have to give you the interest rate they are advertising or that you see in best buy tables on comparison websites.

Some lenders operate on the basis of what’s called ‘rate-for-risk’ pricing, where the rate you get depends upon the risk they think you represent of not paying the credit back on time.

You’ll often see a ‘representative APR’ in advertising. At least 51% (just over half) of people applying for the product will pay this APR or better.

Before you apply for credit, ask the lender what APR and interest rate you will be charged.

If they need to do a credit reference check before quoting this, ask if they can use a ‘quotation or soft search’ (which doesn’t leave a mark on your credit file). This is useful when you are shopping around and not yet ready to apply.

How your credit rating can also affect your existing rate

Lenders don’t just check your credit score when you apply for a new card or loan, or before increasing the limit on your existing credit card or overdraft. They might also regularly review all of their customers to check whether their risk status has changed since they granted the product. If it has, they can increase your interest rate.

Essentially this means that if you fall into a certain group based on your credit rating, and the lender decides that group is now a higher risk than they were previously, they might put up the interest rate for all the people in that group.

So even if you’ve been a good customer and always paid on time, you could suddenly face a hike in rates. That’s why maintaining a good credit rating is essential even if you’re not looking to borrow any more money.


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