Laura Whatley
Rhiannon Philps
Many different factors determine whether you can get a loan or not, and one of the most important is your credit score.
Your credit score is a number calculated by credit reference agencies (CRAs) to indicate how well you have managed your finances and repayments in the past.
There is no magic number that your credit score needs to be to ensure you get a loan. Different CRAs have different scoring systems, which means the score you get from one CRA won’t be the same as another.
Furthermore, lenders will have different eligibility criteria. Some will only offer loans to those with good credit scores, while others specialise in lending to those with a lower score. Your income and other information about your finances will also play a part in a lender’s decision, so your credit score isn’t the only factor to consider.
As well as helping to decide whether you get approved for a loan, credit scores can also help lenders work out the terms of the loan you are offered, such as the interest rate.
Read on to find out more about how credit scores can affect your loan application.
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What is a credit score?
There are three main credit reference agencies in the UK, Experian, Equifax and TransUnion. Each can keep a record of your financial relationships and give you a credit score:
- Experian’s ranges from 0 to 999.
- Equifax’s ranges from 0 to 1000.
- TransUnion’s ranges from 0 to 710.
Even though they have different scoring systems, these agencies will all base your credit score on your credit history and how you have managed your finances previously. Some of the factors that affect your credit score include:
- any applications for credit
- credit repayments (including late or missed payments)
- how much of your available credit limit you’re using
- any financial ties, such as joint accounts or joint loans.
When you apply for any form of credit, the provider will check your credit history from a CRA. Lenders can use different agencies for their credit checks, so it’s worth seeing what your score is with each agency to get an idea of your overall situation.
» MORE: How to check your credit score
Loans for good credit scores
For the three main CRAs, a good or excellent credit score is:
- 881 and above (Experian)
- 531 and above (Equifax)
- 604 and above (TransUnion)
If you have a good or excellent score, you are in the best position to borrow affordably as you are likely to qualify for a wide range of deals, including loans from banks and online lenders.
You are also likely to qualify for the most competitive rates of interest as lenders will view you as a lower risk.
However, a good credit score won’t guarantee you get a specific loan as lenders will also look at your income, expenses, and other factors before making a final decision.
You can use a personal loan eligibility checker to see what deals you may qualify for, without affecting your credit score.
If you have a good or excellent credit score and want to borrow a smaller amount of money over a short period of time, then an interest-free credit card could be an alternative option to a loan.
The most competitive cards are available to those with the best credit scores and, unlike a personal loan, if you clear your card in full each month, or take out a card with a 0% offer, you won’t pay any interest at all.
Be sure you make all your repayments on time and clear your balance before interest charges apply, as credit cards can be an expensive form of borrowing if you fall behind on payments.
Loans for fair credit scores
A fair credit score is classed as anything between:
- 721 and 880 (Experian)
- 439 and 530 (Equifax)
- 566 and 603 (TransUnion)
You could still be able to borrow from mainstream lenders with a fair credit score, but you may not be accepted for their full range of loans or cards.
You may also be charged a higher interest rate on money you borrow than if you had a good or excellent score.
However, some lenders specify that you need a good credit score to be considered for a loan. So, if you have a fair credit score always check the eligibility criteria of a lender to see if it has any specific requirements.
It’s also worth using an eligibility checker to see if you qualify for a loan from a lender. Checking your eligibility involves a soft credit check which won’t affect your score, so it can be useful if you want to see your chances of approval before formally applying.
This can also help to make sure you don’t apply for a loan you don’t qualify for and get your application rejected.
Alternatively, you could use a loan eligibility service instead of applying for a loan directly from a lender.
This allows you to see your chances of getting a loan from multiple lenders, without any impact on your credit score. It’s worth checking to see how many lenders it looks at and to make sure it only uses soft credit checks.
If you don’t need a loan urgently, you may want to wait and take some time to improve your credit score. While you could still get a reasonable range of loan options if you have fair credit, a better credit score could open up even more options and allow you to get a lower rate of interest.
» MORE: Loans for borrowers with fair credit.
Loans for poor credit scores
If you have a poor credit score, you will find it harder to borrow from mainstream lenders or be accepted for the most competitive loans, mortgages or credit cards.
A poor or very poor credit score is classed as:
- 720 and below (Experian)
- 438 and below (Equifax)
- 565 and below (TransUnion)
A poor credit score indicates that you have had problems managing your finances and credit responsibilities in the past, such as missing repayments, so lenders are likely to view you as a higher risk.
As a result, you may not qualify for as many products, and those you are eligible for are likely to come with higher interest rates to compensate for the lender seeing you as a riskier person to lend to.
If you have a bad credit score, you may also find that you can’t borrow as much as someone with a better credit score.
There are specialist lenders that provide bad credit loans for those with poor credit scores. These will come with higher interest rates and will normally be for small amounts, but they will likely be a less expensive option than taking out a payday loan.
A guarantor loan may also be something to consider if you have a poor credit score. This is when a friend or relative ‘guarantees’ the loan and agrees to step in to pay a loan if you are unable to do so, giving the lender more confidence that they will get their money back. As a result, lenders may be more inclined to accept your application.
However, a guarantor loan will tie your finances to another person, and if you fail to pay on time their credit file could be damaged too.
Some providers such as credit unions also offer credit builder loans, which are specifically designed for people with a poor or limited credit history. These kinds of loans aim to help you build up your credit history to improve your chances of accessing more kinds of credit in the future.
Before applying for a loan with bad credit, consider whether you really need a loan right now. If possible, it may be better to delay your application and take steps to improve your credit score. A better credit score could help you to access more deals and lower interest rates, so waiting a few months could save you money in the long run.
What else affects loan eligibility?
Your credit score is important to help lenders make a decision on your loan application.
But it’s not the only factor they will consider. Lenders could also look at:
- your employment status,
- your income,
- your regular expenses and,
- your existing debts.
This information, together with your credit history, will help lenders decide whether to offer you a loan.
Whatever your credit score, it’s always worth checking your eligibility for a loan to see if you are likely to be accepted. It can reduce your chances of applying for an unsuitable loan and having your application being declined. Plus because an eligibility check should only involve a soft credit check, it won’t affect your credit score.
Whenever you apply for a loan, lenders will conduct a hard credit check, which will be recorded on your credit file. Too many applications for credit can affect your score and be off-putting to lenders, so only apply for a loan if you are confident of being accepted.
» MORE: Am I eligible for a personal loan?
Image source: Getty Images
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