How lenders decide to give you credit

By Iona Bain

Do you know what happens when you apply for a loan? The lender begins checking you out. You need to know how they do it.

Before you can borrow, it’s back to school - you have to sit a test. It would be easy to think that you are either a pass or a fail.  In fact, lenders all use their own criteria for judging you, and deciding whether you are a good or a bad risk.

Doing some homework, and getting to know what lenders are up to, will help you move up the class and land the credit you need.

Your score

Credit scoring is how you are marked for risk.  How likely are you to repay on time, or at all? Lenders want to know how reliable you will be when it comes to repaying a loan.When you apply for credit, you complete the application form, and your test is under way.  Each fact about you is given points, then all the points are added together for a total score. The higher your score, the better risk you are.  Lenders will have a pass mark – a red line below which they either won’t lend at all, or will lend at higher than normal rates.  The tricky thing is that every lender has its own way of  scoring you. Want to get clued up on exactly what information lenders do and don't have? Here's the article for you.

Your history

If you have borrowed in the past, that may help. Lenders like to see a history, and the longer the better, especially if your payment record on any loan or card is good.  But what about your regular bills?  Your file will show whether your electricity, TV, mobile, or other commitments are paid on the nail. If not, you may get the credit but have to pay more for it. They will also look at what other credit you have been offered, and how much of it you are using.  If you have unused credit limits, say on credit cards, they may be nervous that you could start using it up. But if you are near the ceiling on a particular card, that could also be a red flag.  Some lenders may be more comfortable if you have a mixed bag of loans or credit than if you are maxing out in one area.  Most will not want to see a rash of applications for new credit in a short space of time, as that could signal you are in trouble.

Your income

Lenders will take a close look at those bills, and your bank account, and see whether you are living within your means. They will make a call on whether you have enough left over each month to be able to afford the repayments of the loan or credit you are requesting. For some types of loans they may ask for proof of your wage or salary, in pay slips or tax forms.  Sometimes,  if your income is not seen as quite high enough a lender will allow you a secured rather than an unsecured loan.   That means it is secured against something you own – a house, car or other asset – but you risk losing it if your repayments go wrong. With a secured loan it's vital not to fall into any arrears. If you do, lenders will start a legal process and charge you for every letter sent out. They can then ask a court to approve a repossession of your asset - don't let it get to that stage

Your watchers

There are three credit reference agencies which are allowed to keep a ‘credit reference file’ on you: Experian, Equifax, CallCredit. When you fill in your application form, it includes a tickbox allowing the lender to get a copy of the file from any of them. The file will show your entry on the Electoral Roll, to prove your address and how long you have been there.

It will show any public record referring to you: a court judgement or bankruptcy, or an alternative to bankruptcy such as a debt relief order, voluntary agreement with creditors, or in Scotland a payment programme or trust deed.  It will show an overview of your bank account, borrowings, and payment records, and any associated person you hold an account with or have applied for credit with.  If you have had a home repossessed, it will show up, as will any other addresses linked to you.

The file also flags up every previous search of it made by any organisation over the past 12 months. Any black mark usually stays on file for six years, then it is wiped, which could mean you have a clean sheet.

Your options

If you are turned down, you need to plan your campaign.  First, find out the reason why you were rejected - you have a right to know.  Then make sure your form was fully and accurately filled in, and you are on the electoral roll, because that helps lenders to verify who you are. Now request a copy of your credit file from one of the three agencies which keep your data, Experian, Equifax and Call Credit.  You are entitled to a free search, and make sure you tell the agency if anything is inaccurate. If your file shows a raft of applications for credit, or credit cards with certain borrowing limits, take action by closing down cards or asking for your limit to be reduced.  Finally, tackle the root issues by trying to get your spending under control. You may find your need to borrow is not as pressing as you thought. There are a lot of myths about what actually affects your credit score, make sure you read these answers.

Getting inside the mind of lenders is a great strategy when you do need to turn to them for help.

By Iona Bain

Iona is the author of Spare Change, an inspiring, down-to-earth handbook for the compulsive spender, budget-phobe or anyone that just wants to improve their financial savviness. She writes regularly for the Times and Herald newspapers and has also appeared in the Telegraph, Independent and Daily Mail. When not writing, Iona loves writing and playing music - her songs can be heard at

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