Being aware of credit scores can be a good way of assessing the likelihood of being accepted for a loan, credit card or mortgage, but consumers who see small sudden falls in their score should not let it deter them from applying for credit. Instead, it is important to understand how lenders view credit scores, other factors they consider when lending money and why it is important not to panic if the credit score falls unexpectedly.
When lenders assess an application from a borrow, they will look at the applicant’s credit file and not necessarily their credit score. The credit file, which consumers have the right to see, keeps all information about the potential borrower’s credit history, including whether they are on the electoral roll, any financial links to other people, any county court judgements or decrees, all the credit products they’ve held in the last six years, and whether they’ve kept up with repayments.
A credit score will also often look at many of these factors, but the credit score is designed to give consumers a rough estimate of how they will be viewed by a lender. As such, different credit check companies will provide different credit scores, for example TransUnion offers a score out of 710 whereas Experian offers scores out of 999. Although credit scores can be a useful guideline for consumers to assess how they are seen by banks, building societies and other lenders, it is important to keep in mind that the lender will be taking far more into consideration.
When viewing their credit scores, consumers should also keep in mind that their score will likely go up and down regularly. Any small changes, such as paying off a credit card or loan, can impact the credit score. As such, consumers should not panic if one month they see their credit score suddenly fall, but they should still keep regularly checks on their score to ensure that all the information held on them is accurate and up-to-date.
Another reason why credit scores may not determine whether a credit application is approved or not is that different lenders look for different criteria in borrowers. Some lenders may look for a borrower who has a low amount of credit available, for example who only has one credit card with a low credit limit – often viewed negatively by credit scores – however other lenders will look for borrowers who have a higher level of credit available. What the majority of lenders will look for is to ensure that borrowers are able to manage their credit and keep up with monthly repayments.
Overall, most lenders are reviewing how profitable they believe the borrower will be. This means that lenders will be looking at the borrower’s credit file, along with their application form and any previous dealings they’ve had with the company, to determine how profitable they believe they will be. This profitability is also weighed against risk – for example, a borrower who has defaulted on repayments in the past will not be profitable and instead will be considered high risk, which means that they will more likely see their application for credit rejected.
Credit scores do not hold one key factor lenders usually look for when assessing a borrower’s application – their affordability. Normally, lenders will want to know how much the borrower earns, information the credit score does not have, and some lenders, such as mortgage lenders, will want to assess their monthly outgoings as well. Overall the affordability will have a significant impact on whether a borrower’s application is accepted, for example a consumer with an excellent credit score and who earns £50,000 a year will likely be accepted for a loan of £10,000, whereas someone with the same credit score but who is unemployed and has no annual income will likely be rejected.
While it is important to not panic about credit scores, especially when small changes occur, if consumers see a sudden significant drop in their credit score they should look at finding out why and looking for ways to improve their score. Those who have defaulted on payments, had a county court judgement or decree, or who have been declared bankrupt will normally have a poor credit score and will likely find it hard to be accepted for credit. Those who see a significant fall in their score for no reason, however, should check their credit file to ensure all the information is accurate and find out why their score has fallen. As well as this, consumers should regularly check their credit score – which can be done online for free here – to ensure that their information is accurate.
Consumers who have a poor or low credit score can work on improving their scores - our guide on how to improve credit scores provides some useful tips on how to do this.
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