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Believe it or not, your credit score is not what lenders use to decide whether to lend you money. What they really care about is your creditworthiness. We admit it – creditworthiness is a pretty dry financial term. But it’s something you need to understand, because it has a huge impact on whether you can borrow and on what terms.
At Credibble we’ve learned which factors lenders actually use to make their decisions. Read on to find out the truth behind how lenders score you.
What does creditworthiness mean?
When you apply for credit or a loan, lenders want to know how high the risk is for them. They are a business after all, so they’ll want to know for sure you can pay their money back. If you are creditworthy, it’s just a way to say that you’re a good potential borrower, and they can trust you to repay what you owe.
How do lenders know if I’m creditworthy?
To check your creditworthiness, lenders will usually take a close look at your credit file. Your credit file is supplied by organisations called ‘credit reference agencies’. The three main agencies in UK are Equifax, Experian and Callcredit. Lenders will use at least one agency to see how creditworthy you are.
Although they all will use your credit file, each lender has their own set of criteria to assess it and make decisions. Until now, these specific rules have been kept hidden. This has made it very difficult for people to know where they stand when applying for a credit card, loan or mortgage.
What do lenders check?
To give yourself the best possible chances on your application for a credit card, loan or mortgage, it helps to know what lenders are looking for. That’s why we have spoken to industry insiders and uncovered the factors lenders really use to score applications.
So without further ado, here are the things lenders will check when deciding whether to give you credit:
This relates to the credit accounts you currently use, how many you have, and how long you’ve had them for. A higher number of accounts is like a vote of confidence from other lenders. This is because they already decided they could trust you.
This includes things like how much of your income you spend on repaying debts. It also accounts for how much of your credit limit you’ve used. Finally it takes into account anything else that could show you’re strapped for cash. Lenders want to make sure you’re not in any financial difficulty, and that you manage your money well.
This shows how well you make repayments on time and for which types of credit, such as mortgages, loans or credit cards. It may seem obvious, but making late payments on your credit card or missing a payment on a loan can damage your creditworthiness. This is because it shows that you are not always reliable with your payments.
This takes into account any ‘bad credit’ you may have on your file, such as a bankruptcy, CCJ or defaults. Lenders will look as far back as 6 years to check for this on your credit file. As time passes, the negative impact of bad credit will generally decrease.
Lenders want to see stability and consistency in your work arrangements. The ideal is to have a stable job with one employer for a significant period of time. This proves to lenders not only that you have a steady income, but also that you probably won’t lose this any time soon.
This takes into account the stability of your living situation. Again, lenders like to see that you are in a stable position, as this means less risk for them. Multiple address changes in the last few years can be a sign of personal or financial troubles, which could affect your ability to make payments.
Beware payday loans and multiple credit enquiries!
If lenders see on your credit file that you’ve applied for a payday loans in the past year, it can have a negative effect on your creditworthiness. This means there’s more chance your application will get rejected, or that they’ll offer less affordable rates.
The payday factor
Payday loans look particularly bad to lenders, because they give the impression that you’re struggling financially. This is a big red flag, because if you are not on top of your finances it could affect your ability to repay what you owe.
Too many hard credit checks on your credit file also makes you look bad to lenders. They can make it seem like you’re desperate to borrow, and you are not in a stable financial situation. A hard search is conducted every time you make a formal application to borrow money.
This is why it is important to only apply for credit when you know you have a very strong chance of being accepted. If you apply and get rejected, you’ll still have that hard check recorded on your credit file!
Can I boost my creditworthiness?
Yes you can. Obviously, it’s impossible to turn back the clock on your past financial behaviour. But you can still make sure that you are in the strongest position possible to get accepted for credit before making an application.
How we can help
This is where Credibble can help, and it won’t cost you a penny. We have designed a new system that lets you understand and manage your creditworthiness. This way, you can borrow what you need at more affordable rates.
Firstly, we provide you with a free Lender Score. Unlike an ordinary credit score, this is based directly on what lenders consider when they assess you. We also give you an in-depth Lender Report, so you get to see exactly how your score is made up and where you stand for each factor.
And it gets even better. Our smart Score Booster can analyse your unique profile to give you helpful insights for improving your score. This way, you can take practical steps towards financial fitness!
Of course, we can’t deny that creditworthiness is tough to build once it’s lost. Making sure to pay attention to your finances now can save a lot of stress in the long run.
It may seem scary that all these aspects of your daily life and finances have an impact on how lenders see you. So just take things one a day at a time. If you keep track of your Lender Score and set yourself smart goals, you’ll be in a much stronger position to get the credit you need.
Get started today with your free Credibble account
Last edited by Oliver Macmillan, April 2022