Most people are aware of the fact that lenders look at their financial histories when deciding what terms and conditions they should be offered when asking for a loan. However, very few understand exactly how these details factor in what type of deals they get. Although there are now hundreds of online lending services in the UK that give out next-day loans using only proof of address and proof of income, banks will still look at your financial history in order to determine if you are to be trusted with a larger amount of money or if they should request collateral.
This having been said, lenders will rarely look at the entirety of your financial history. In most cases, only your credit rating will be analysed. This rating, or score, is composed of several factors that show how your past relationships with lenders have been. They also indicate your ability to manage your finances and to repay loans.
There Are Several Types of Credit Scores
Before moving forwards, it is important to mention the fact that there are several types of credit scores. This is due to the fact that there is more than one credit rating agency. Unfortunately, none of them discloses the formulae behind their scores, however, when a bank is assessing your loan request its representatives will look at the scores from all rating companies.
Although the way in which the scores are calculated is kept secret, the credit rating levels are available to the public. For example, the ranks for Experian are as follows:
- 0-560 – Very poor;
- 561-720 – Poor;
- 721-880 – Fair;
- 881-960 – Good;
- 961-999 – Excellent;
The scale differs from one agency to another. Equifax has a point system that ranges from 0-279(very poor) to 466-700(Excellent), while TransUnion considers that those who have between 0-550 have a poor score and anyone with over 628 has an excellent one. The exact rankings may change over time, however, they are always available on the agencies’ websites.
Everything Counts Towards Your Credit Score
Although we do not have an exact formula for how the credit score is calculated, it is possible to determine what goes into this value:
- Your credit utilisation ratio – This usually refers to how much debt you have in your credit cards. For example, if you have a credit card with a £10,000 limit attached to it, and have used it to pay £7,000, you will have a 70% credit utilisation ratio. Generally speaking, you will get better terms and conditions if your;
- Your past relationships with banks and other lenders – This refers to how accurate you have been in the past when it comes to making monthly repayments on time;
- The types of loans that you’ve taken out in the past and their terms – Lenders will also look at how many loans you’ve taken out in the past and have successfully repaid. Through this, they will look for general information. An individual who has never taken out a loan will have very little financial information to show;
- Your income stability – Lastly, lenders will look at how stable your income is. In order to trust you with large amounts of money, they will want to see that you are able to have a constant income from one year to another;
All of these details go into calculating your credit score. Although some lenders may consider certain details more important than others, it is a good idea to keep all of them in mind when preparing to take out a loan.