To access the most competitive loans and credit card deals, you need a good credit rating, and not only that, you need it to stay that way. If you have a poor credit rating, it can make it more difficult and expensive to secure the finance you need.
How do lenders decide whether to lend to you?
Banks, credit card companies and other commercial lenders will take a vast amount of information into account when considering whether to approve your application. That includes your income, your financial situation, the reason for the loan and your credit rating. Your credit rating or score can have a big impact on the type of deals you’re able to access and whether you’ll be accepted by the lender at all.
A lender is not obliged to offer you the rate you see advertised. That rate will be offered to at least 51 percent of borrowers who present the least risk. Other prospective borrowers will be assessed on a ‘rate-for-risk’ basis, where the rate offered depends on the perceived risk of the borrower not repaying the loan on time. The credit rating of an individual plays an important part in these calculations.
How can a poor credit rating affect you?
If you have a poor credit rating, you could be:
- Charged higher interest rates
- Given a smaller credit limit
- Be rejected for a loan upfront
For that reason, before you apply for a credit card or loan, it’s wise to ask the lender what interest rate you’re likely to be charged and whether you’ll be accepted for the loan at all. It might be that the lender has to do a credit reference before they can give you this information, in which case, always ask them to do a ‘soft credit check’. Unlike a ‘hard credit check’, a soft check will not leave a mark on your credit record and potentially damage your credit rating further. Find out more about hard and soft credit checks.
If you are rejected for a loan based on your credit rating, don’t worry, there may still be other options available to you. Some lenders offer specialist loans for bad credit customers. This guide from Wonga does a good job of outlining your options.
Your credit score may also affect your existing rate
Many borrowers are unaware that a worsening credit record could impact the interest they pay on existing loans. Many lenders review the credit records of borrowers to see whether their risk status has changed. So, if something damages your credit rating while you have a credit card or loan, you may find that the interest you pay increases, even if you’ve made all your repayments on time. That’s why it’s so important that you work hard to maintain your credit rating, even if you’re not looking to borrow more money at the time.
How has your credit rating affected your ability to borrow? Has your interest rate ever been increased midway through a loan? Please share your experiences with our readers in the comments below.