There’s a lot of confusion surrounding what credit ratings actually are and how they’re put together. Given that, for many families and individuals in the UK, access to credit is vitally important and given that our credit rating heavily influences our access to credit, it’s no surprise that many people worry about whether they will be able to borrow money when they need to.
Let’s take a look at the facts. Let’s say that you want to find the best offer out there on 12-month loans. What’s the best way of doing so without damaging your credit rating and without needing a guarantor?
What is a credit rating?
A credit rating is like a scorecard and this scorecard is designed to give finance companies an indication of how likely you’d be to pay a loan back in full and on time if they lent money to you.
Your credit rating is made up of a number of different pieces of information. There’s basic information like where you live now, your address history, people that you live with, your date of birth, whether you’re registered to vote, and whether you’ve been subject to bankruptcy or an individual voluntary arrangement.
Then your credit report goes into far more details. It keeps track of the number of different “accounts” you have. An “account” can be a credit card, a loan, your bank overdraft, your mortgage, or even your mobile phone airtime provider. Each account record holds a variety of different information including your balance (for example, how much you’ve spent on one credit card account) and your limit (how much you could spend on your credit card).
Each of these accounts is updated every month with information on whether you’ve paid this month’s bill or not. Every time you successfully make a payment, that works in your favour. Every time you miss a payment, this counts against you.
Your credit rating also records how much debt you have access to and how much of it you’re using. If you have £20,000 credit through loans and credit cards and you’ve used £18,000, that will not look as good for you as if you’d only used £5,000.
All of this information is then joined together to produce your credit rating. There’s one more important influencing factor that we’ll come onto in a minute or so.
Who provides lenders with credit ratings?
There are three main providers of credit ratings in the UK – Experian, Equifax, and CallCredit. Each of them holds essentially the same information about you but they assess it differently from each other. So, in some cases, your credit score might be really good with one but not as good with another.
What happens when you apply for a loan?
Every time you apply for a loan, a lender will apply to see to your credit rating and credit file. They have to do this by law. There are two different types of search – a hard credit search and a soft credit search.
If your lender applies for a hard credit search, the fact that they’ve searched you will be recorded on your credit rating file. And this is the final important factor we mentioned earlier in this piece. If you apply direct to a lender who performs a hard search and they see that you’ve made multiple recent applications for credit with other lenders, this will reflect very badly on you. In the mind of a lender, you look desperate for money and a lender will think that desperation means that they’ve got less chance of getting their money back from you.
Alternatively, a lender may perform an initial soft credit search. Soft searches don’t provide lenders with anywhere near the level of detail that a hard credit search does, however, lenders view them as “indicative” – based on what they see on your soft credit search, you might just be the type of borrower they like to lend money to.
However, before a lender will make you a firm offer, they will have to perform a hard credit search on you. This has consequences and it doesn’t work out in your favour. Let’s say that you try to find a £2,000 12 month loan through five different lenders and that your first two applications were turned down. You then make two more applications with different lenders – one says “no” and the other says “yes”.
The lender who says “yes” will likely charge you a much higher interest rate than they would have done had you applied to them first because they’ve seen those three searches on your account.
Can using a broker protect your credit rating?
Yes, and we’ll tell you how in just a second.
There’s a very important point we want to make. You might have heard of 12-month loans which require you to find a guarantor. The guarantor will pay any outstanding amount on your loan if you find that you can’t make any further payments. With guarantor loans, both you and your guarantor have hard credit searches run against you – unfortunately, there’s no way of getting around it.
Don’t apply for a guarantor loan – if you’re worried that you have bad credit, consider finding the best offer for 12-month loans with no guarantor instead. It’s much quicker in most cases and you won’t put your family relationships or friendships at risk if your guarantor is forced to pay the money back because you’re not able to. It also gives you a chance to build up your own credit rating.
By using a broker like Loan Princess, we might apply to five, ten, or fifteen different lenders to find the right loan for you. However, what’s different is that we carry out a hard credit search on you once and send the files over to each lender. There’s only one hard credit search ever with Loan Princess. Let us do the hard work and find the right 12-month loan with no guarantor for you.
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