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If you’ve struggled with debt in the past or you’ve never borrowed money before, you might be wondering if you need a good credit score for a loan. Let’s take a look at how credit scores are calculated and how you can improve your chances before making an application.
Whether you’re applying for a loan, credit card, or car finance deal, your credit score is important. However, there is no set credit score you need for a loan.
Some lenders have very strict criteria and will only lend to those with high scores, but others are more flexible and willing to lend to those with imperfect credit scores.
The higher your credit score, the easier it’ll be to get a loan with favourable terms and a good interest rate, but a low score doesn’t necessarily mean you can’t get a loan.
Try not to put too much thought into what credit score you need to get a loan. Instead, focus on improving your credit report as a whole. As we’ll explain in more detail later, you can do this with the help of good money habits and sensible debt management.
Credit scores are created by credit referencing agencies. Each credit referencing agency has its own system for scoring individuals, meaning you’ll have a different credit score for each agency.
In the UK, there are three main agencies and these include Experian, Equifax and TransUnion.
These agencies will use information they have about you and your finances to create your credit report and calculate your score.
Your report will include the following:
Personal details
Past addresses
A list of any existing lines of credit (loans, mortgages, credit cards, car finance etc)
Outstanding balances
Late or missed payment details
Joint bank accounts, joint mortgages and joint credit cards
Details of any CCJs or bankruptcies
Soft searches and hard credit checks
Soft searches will only be visible to you, but the rest of the information on your credit report is viewable by lenders. Lenders will then use this information to determine whether to lend to you or not.
The better your credit score, the easier you should find it to get a loan. Those with bigger scores tend to have a wider choice of deals and access to better interest rates too.
However, lenders are less concerned with your credit score itself than they are with your credit report as a whole and your overall financial situation.
They want to see examples of you managing debt sensibly, paying on time and in full, and not maxing out existing lines of credit.
They’ll look at your income and expenses to work out whether you can comfortably afford your repayments.
Some lenders even look at your address history. Those who’ve lived at the same address for a number of years may find it easier to get a loan.
Although it’s usually easier to get a loan with a good credit rating, you don’t necessarily need a good credit score for a loan.
Some lenders specialise in helping those with bad credit, though you might not be able to borrow as much money. Your interest rate will probably be higher too.
This is because you may be considered a high risk borrower and lenders will want to protect themselves financially in case you default on your payments.
It’s a good idea to try and improve your credit score before applying for a loan. There are lots of ways to do this. These include:
Registering to vote can improve your credit score, even if you don’t actually cast your vote on election day. Being on the electoral roll makes it easier for credit referencing agencies to confirm your identity.
If you’re not on the electoral roll, lenders may ask for other documents that prove your identity and address. This can slow down the loan application process, so make life easier for yourself by registering to vote.
The best thing you can do to boost your credit score and improve your chances of getting a loan is to pay each bill on time and in full. This shows that you’re on top of your finances and can handle debt sensibly.
If you’ve ever had a joint bank account or another joint finance product with a partner, this will be included on your credit report. When you apply for a loan, lenders may look into your partner’s credit history as well as your own.
Even if you’ve broken up with this person and no longer combine your finances, their financial behaviour could still affect yours. Thankfully, it’s possible to financially ‘delink’ yourself from them. You can do this by contacting the credit referencing agencies and asking for a notice of disassociation.
If you have large balances on existing credit cards, overdrafts or personal unsecured loans, it can be a good idea to pay these off before applying for a new loan.
As a general rule, try to keep your credit utilisation rate at 30% or below. Your ‘credit utilisation rate’ refers to the amount of available credit that you’re actually using. So if, for example, you have access to £1,000 and you only borrow £300 of that money, your credit utilisation rate is 30%.
It’s okay to go over this percentage. You could use all of your available credit if you wish, but the credit referencing agencies recommend staying around the 30% figure to maintain a healthy credit report. By keeping your utilisation low, you can prove to lenders that you aren’t desperate for credit.
If you’re hoping to apply for a large personal loan in a few months’ time, it’s a good idea to avoid applying for other lines of credit in the run up to your main application.
This is because every time you apply for a line of credit, a ‘footprint’ is left on your credit report.
Too many of these footprints can harm your credit score and make it difficult to get approved for other loans. Getting approved can be particularly challenging if you’ve been rejected recently.
To improve your chances of getting a loan, try to spread your applications out and avoid applying for several in a short space of time.
