Do you have good credit? Here’s what you should know about applying for a personal loan

Credit bureaus define "good credit" differently: it's 881-960 for Experian; 531-670 for Equifax; and 605-627 for TransUnion. If you have good credit, you can afford to shop around and compare the best rates for personal loans.

Laura Whateley Last updated on 30 June 2021.
Do you have good credit? Here’s what you should know about applying for a personal loan

Banks and loan companies want to understand the risk involved in lending money. How likely are they to get it back on time and in full? The greater the risk, the more they want to be compensated. This compensation may come in the form of higher interest rates, less favourable terms, smaller loans, or additional charges and fees.

Lenders assess risk by looking at borrowers’ incomes and outgoings, but also their credit files.

The better your credit score, the less risky you seem and the better the deals you can get.

» MORE: What credit score do I need for a loan?

What is a good credit score?

There are three credit reference agencies in the UK, Experian, Equifax and TransUnion. Each keeps a record of your borrowing history, and will give you their own credit score.

» MORE: How to check your credit score

Experian's credit scores range from 0 to 999. Equifax’s credit scores range from 0 to 1,000. TransUnion's credit scores range from 0 to 710.

Each agency also has a scale for what score it considers to be good, fair or poor. A good score from Experian, for example, is between 881 and 960, for Equifax it’s 531 to 670 and TransUnion, 604 to 627. The thresholds for these can change so always keep up to date when examining your credit score with these firms.

These scores are just a guide, each lender has its own bespoke way of assessing your creditworthiness, but they are a useful starting point.

How to find a loan

If you have a good or excellent score, you can afford to shop around before you apply. Discover the average and lowest interest rates on personal loans at the moment via NerdWallet’s comparison site. Seeking out the cheapest way of borrowing for your situation could save you hundreds, maybe even thousands of pounds.

» COMPARE: Personal loans

You could approach a bank, a company that specialises in loans, a credit card firm, a car financer or a peer-to-peer lender to borrow money from directly. With a good credit score you can be more confident that you will receive the terms and APR advertised.

How to apply for a loan

Don’t apply for lots of loans at once just to see what you’ll be accepted for. It’s important to remember that too many applications in a short space of time will reflect negatively on your credit file and will dent your credit score. It’s better to use a soft credit search - often referred to as a free eligibility checker - as they won’t show up on your credit file. These are available from most lenders or loan broker sites, to see which loans you’ll be accepted for and at roughly what interest rate.

» MORE: How to choose a personal loan

Given that, as someone with a good credit score, you should have the pick of lenders and products, make sure you understand the small print, and hone in on the most suitable loan for your needs and circumstances. Just because something is badged up as a car loan or a wedding loan, or a home improvement loan, it doesn't mean it’s the only or cheapest way to fund your purchase or event.

The general rule is that the longer you borrow, the more expensive the loan ends up costing, even if the headline interest rate looks low.

» MORE: Tips for successfully applying for a loan

Types of loans available if you have good credit

Many loans, including unsecured personal loans and home owner loans or mortgages, will charge you an exit fee or penalty for clearing your loan earlier than agreed. If you expect to be able to repay a loan quickly, you should consider a loan with a shorter term or look for deals without early repayment charges.

When comparing loans like mortgages, look at arrangement fees, as an interest rate might look appealingly low but you could end up spending more on arrangement fees or other associated costs that come with complex borrowing such as mortgages.

» COMPARE: Mortgage deals and rates

If you are borrowing a small sum, no more than a few thousand pounds, you could consider using a credit card instead of a loan. Credit cards may charge higher interest rates, but only to those who do not clear their cards in full each month.

You can borrow with a credit card without paying anything at all in interest if you use it wisely and pay your balance off in full each month.

If you want to borrow for longer than a month, and you have a good credit score you will also be able to apply for a 0% purchase or balance transfer credit card, which gives you a set period, sometimes as long as two years, to borrow without paying any interest at all. This will be considerably cheaper than most personal loans, but only if you are able to clear the balance before the 0% period comes to an end.

» COMPARE: 0% balance transfer credit cards

Image source: Getty Images

About the author:

Laura is a journalist and author, writing about money since 2008. Including writing for The Times for 9 years. She believes finance doesn't need to be complicated. Author of Money: a user's guide. Read more

Want to look at your lending options? Compare loan providers now

If you have any feedback on this article please contact us at [email protected]