What is a credit score?

A credit score is a number used by lenders to help them decide how likely it is an applicant will pay back the money they borrow.

Before we get started, it’s worth clarifying that you do not have one universal ‘credit score’.

It’s true that most organisations will use similar factors to determine a customer’s credit score. However, every lender and credit bureau will have their own rules and scoring systems.

The credit scores you can see online are designed to give you a general idea of your credit score. They’re purely illustrative and should only be used to help give you an idea of ways you could improve your score.

The scoring systems used by lenders are designed to meet that lender’s criteria for that specific product.

In this guide, we’ll take a look at what lenders typically look for in an applicant, and how they use credit ratings to help make their lending decision.

What do lenders use a credit score for?

A personal loan provider will use credit scoring to assess the specific risk of an application, such as the chance of a customer defaulting on their repayments. It’s ultimately used to ascertain which applicants to accept, and what rate to offer.

Typically, a lender’s scoring system is developed by looking at the past behaviour of previous customers. If your credit file looks similar to the credit file of customers who’ve defaulted on their payments in the past, it’s more likely you’ll be predicted to be a risky customer. Of course, this is all done using statistical techniques and advanced technology – scoring systems are never calculated by individual people to ensure results are free from human bias.

The way lenders score applicants is confidential, so there’s no real way to understand what elements of your credit report will make the biggest difference to your application. However, the following factors are most likely to impact your score:

• How you’ve managed debt in the past (i.e. whether you’ve made late payments or missed them altogether)
• Recent financial circumstances (whether you’ve recently taken on more credit, are maxing out your current credit limits or you’re evidently applying for credit with numerous lenders)
• Levels of debt (how much debt you have compared to the income you have coming in, for example)
• Personal circumstances (whether you’re on the electoral roll, how long you’ve had your current account, how long you’ve lived at your address etc)

Will my credit score impact my loan application?

As we’ve said before, individuals don’t have one universal credit rating. However, your loan provider will use their own scoring system to predict how likely you are to be a good customer.

As every lender has their own scoring system, there’s no real way to know why you may be deemed a good applicant by one lender, or why you may pose more of a risk to another.

Even though the credit score you see online might be good, your current circumstances might not always be a suitable fit for all finance products.

The best example here is low-rate APR loans. More applicants typically get declined for this type of product. Lenders will only offer the very best rates to customers with the lowest level of risk, as these customers are most likely to be able to pay the loan off reliably. As only a small percentage of customers will be offered the best rate for this product, accept rates may be lower and other higher rates may be offered to customers who don’t meet the stringent scoring criteria.

Yes, it’s correct that providers must offer the Representative APR to at least 51% of customers, but it’s worth keeping in mind that this only applies to 51% of paid out customers.

It may be more likely a larger percentage of customers will be accepted for credit products such as credit cards or high-APR loans, for example. This is because lenders allow more people to access credit, but this can be costly for the customer and you could end up paying higher interest rates.

Will my income impact my credit score?

Your credit score will be determined through several factors such as your reliability, stability and recent financial behaviour – all of which will be demonstrated on your credit report. Credit scores aren’t universal and, as such, the credit score assigned to you by a lender may also be based on information submitted by yourself at the point of application which may include income.

While your salary is not directly recorded on your credit report, affordability will likely be factored into any lending decision too.

How can I improve my credit score?

Your credit score is likely to naturally improve over time as your credit experience builds. However, if you are keen to actively improve your credit score, the best way to do this is to ensure you pay your existing credit on time. It sounds simple, but this really is the most effective way to show lenders you’re a reliable borrower.

Only borrow as much as you need, to give yourself every chance of being able to make your repayments in full and on time each month.

Are you looking to borrow money?

If you’re reading this guide, chances are you’re thinking about taking out a personal loan. With Novuna Personal Finance, you could borrow between £1,000 and £35,000 with competitive rates from as low as 7.4% APR Representative (£7,500-£25,000). Get a quote using our online loan calculator today.

For more advice on credit scores, money-saving tips and managing your budget, bookmark our Hints and Tips page.