Your credit rating (or credit score) is affected by your history of borrowing and repaying credit. If in the past you failed to repay credit or missed repayment dates, this will probably reflect negatively on your credit file. Other information stored on your credit file includes previous credit applications made, your total credit limit, outstanding debt, and any repayments that went into default. The information on your file can be summarised into a credit score, which is a number indicating how likely it is that, at a specific point in time, you will be able to repay credit and is specific to the firm that created it.
Credit reports and credit scores are provided by Credit Reference Agencies (CRAs). There are 3 primary CRAs in the UK: Equifax, Transunion (formerly known as CallCredit), and Experian. Different lenders gather data from different CRAs. Therefore, your credit score may differ between lenders as each agency does not necessarily draw on the same data to construct your credit score.
Essentially, a person's credit score can be used by lenders to help them make decisions about who they will lend money to and how much. A high credit score generally indicates that a person is likely to be able to make repayments on time. Lenders tend to prefer such customers as there is at least some historical evidence that this individual can manage their finances and subsequently repay credit. Ultimately, lenders want to make sure that they are able to recoup the money they lend out. As such, if you have a low credit score you may not be able to be approved for loans or mortgages, rent property, or get a credit card or mobile phone contract.
If you have a so called "thin credit file" you may also face difficulty securing credit. Having a thin file means that there is not a lot of data available on your credit history, and therefore it does not provide strong evidence for either positive or negative credit history. This is often the case for young people who have not had time to establish a credit history, individuals who do not have credit cards, or those who have just recently come to live in the UK (credit history does not get transferred between countries).
While a bad credit rating can affect your everyday life by restricting your access to products and services involving credit (mortgages, credit cards, payday loans), it can get especially difficult when financial emergencies crop up. Many companies are likely to deny you credit if you have a low credit score. That being said, it is not an impossible feat! There are lenders out there willing to provide credit to those with a less than ideal credit history.
Risk tolerances (i.e. the amount of risk a company is willing to accept) differ between companies and lenders. Each lender decides for themselves what amount of risk they are willing to tolerate when it comes to their client's ability to repay their debt. Therefore, there are lenders that provide credit to those with lower than average credit scores.
These forms of credit are frequently referred to as 'bad credit loans'. These loans usually have lower principal denominations, shorter repayment time periods, and carry higher interest rates (leading to the term High Cost Short Term lending). This allows lenders to offset the risks of not being paid back whilst still making borrowing possible for those who need it, irrespective of credit history.
It may be useful to get an idea of your own credit score in order to evaluate your chances of being approved for credit lending services (such as loans or mortgages). The three CRAs: Equifax, Transunion and Experian, each have a different scoring system. It therefore makes sense to check all three.
It is possible to gain free access to your credit file and credit score online:
Your credit score is a reflection of your current circumstances and will thus change over time. What lenders consider to be a "good" or "sufficient" credit rating depends on their own judgement. As a rough guide, the CRAs each have a range of scores considered to be good. For Equifax this is a score above 420 (out of 700), for Transunion a score of 4 (out of 5), and for Experian a score above 880 (out of 999).
If you have a low credit score, there are some steps you can take to improve it to create new possibilities for yourself in the future. There is no overnight fix, but with some work and knowledge of how your actions affect your credit score it is possible to increase it over time.
When deciding who to lend money to, we consider a range of factors that may impact on an individual's ability to repay what they have borrowed. This is including, but not limited to, checking your credit rating. As a responsible lender, we need to ensure (for our own as well as your benefit) that the repayment of your loan will not bring about or worsen your financial state. We consider everyone's individual circumstances and needs and look at the bigger picture before making our decision.