How lenders decide to give you credit
When you are looking for credit, the lender will need to make a decision. They will look at various factors to decide to offer you a loan or any other form of credit. By looking at these factors they are able to determine the risk of lending to you. Based on the level of risk, your loan may be declined or approved.
If you have bad credit, you may still be able to get a loan or mortgage. The lender may give you the credit with a higher rate of interest to offset the risk. Here we take a look at what lenders use to decide to give you credit.
What lenders look at before offering you credit
Any application for credit will need a credit check, but that is not all lenders will look at. Your credit score will be the main factor, but other things are taken into account too. Lenders will use the following to decide whether to give you a loan:
- Credit score
- Employment history
- Income
- Length of time at current address
Credit score – Your credit score uses various information to show an indication of the risk of lending money to you. Different credit agencies hold information about you. A lender may apply to one or more of these to assess your suitability for a loan or mortgage. Please read our 7 tips for improving your credit score.
Each lender or financial institution will usually have a minimum credit score they will accept. If your score is below this, the loan application may be refused. You may still be able to get a loan, but the bank may decide to offer you a lower amount.
When you apply for a loan, the bank won’t tell you your credit score, but you can ask which agency they use. You can request a credit report from the credit agency.
Employment history – Your credit score is essential, but lenders are also starting to look at employment history. A proven track record with the same company for several years is more appealing to banks. It shows that you have a stable job and a reliable income. You will be able to make your payments each month and be more likely to keep up with loan commitments.
If you have a history of jumping from job to job, a lender may be less likely to offer you credit. It can cause concern to a mortgage company if you tend to move position regularly. You may not be able to get the loan you want. The lender may still offer you a loan but may offer a higher interest rate.
Income – Your income is just as relevant to a loan company because it shows what you can afford. A steady income indicates that you will be able to manage your money. Inconsistent earnings, such as commissions, etc. may not be taken into consideration. If you have a low income, there may not be enough money coming in to meet the debt repayment.
Personal income is a big thing to a lender and will affect the loans and interest rates you can get. Bear this in mind when considering any loan amount you may want.
Length of time at current address – As with job stability, the length of time at your current address is also important. If you have been at your existing home for many years, it’s a good sign to lenders. It shows you can manage mortgage or rent payments. The bank will see that you can handle financial commitments over a period of time.
Information on your credit file
As your credit score is an integral part of a loan application, it is crucial to make sure the information is correct. Credit reference agencies keep information on your borrowing and payment history. Any application for credit allows the lender to check your credit reference file.
Credit reference agencies collect information from:
- Electoral roll – addresses where you were registered to vote and the dates
- Account information – your current loan commitments and bank account activity
- Public records – they will see any bankruptcies, court judgments or debt relief orders
- Linked people – anyone you may be linked with financially, such as a joint account or mortgage
- Searches – details are kept about any credit searches over the last 12 months
There are three main credit reference agencies. A lender may use one or more of these when deciding on your loan. If you are refused credit, you can ask which agency was used. You will be able to apply to that agency and see your information.
It is crucial to go through everything they have on your file. If there are errors, write to them and let them know. The errors may be affecting your overall credit rating. Getting the problems fixed can help improve your credit score.
What to do if you have a low credit score
If you have a low credit score, you can still get some forms of credit. Many banks have loans for low or bad credit scores. These types of loans often have higher interest rates than others. Because it is considered a higher risk, the bank raises the interest rate to offset the loan risk.
Alternatively, the bank may ask for a guarantor for the loan. A second person signs an agreement to repay the loan if you don’t. It can allow you to get the credit or loan you need. The bank has another person that will be liable for the loan, so they take less risk.
A guarantor will be on the hook for your loan if you don’t pay it. Make sure the person is aware of this before signing anything. The bank will also check the credit score of the guarantor so you will need someone with good credit.
If you are looking for mortgage deals or loans for people with bad credit, we can help. We work with a variety of banks and lenders. Our experts can find the right solution for your credit needs.