Unsecured Loans - How Might My Credit Rating Be A Problem?

The chances are that if you’re reading this, you are either already in the process of applying for a loan or have already applied for an unsecured loan but have had some difficulties in being accepted, right? You might be wondering whether these difficulties have something to do with your credit rating? You could be right, but even if you’ve never missed any repayments in the past, it still doesn’t guarantee that your credit rating will enable you to borrow the money from any lender.

Firstly, there is a difference between your credit history and your credit rating. With your credit history, every time that you apply for a new form of credit: mortgages, secured loans, unsecured loans, tenant loans, credit cards, store cards, catalogues etc, you will create a record of your application which will be available for viewing (with your consent) from one of the major credit reference agencies such as Experian or Equifax.

Lenders will want to have access to your credit history when you apply for any form of credit as it provides them with a good indication of their potential risk in lending you the money in the first place. The reason for this is that the credit history also shows each and every repayment that you make on your existing credit and every arrear, default and CCJ (County Court Judgement) against you. In this way, your credit history is a very valuable tool for assessing the likelihood of you defaulting in the future, however it is not the only tool that the lender will use.

So What Is My Credit Rating?

It is highly probable that the lender you apply for your unsecured loan or tenant loan to will ask a lengthy series of financially related questions through the course of your application. They may want to know about your residential status and how long you have lived in your current property. They may want to know about your citizenship, your income and your outgoings. Each of these questions allows them to build up a picture of their view of your credit worthiness. The answers you provide will be converted into a points score and the number of points you have at the end of the process will show the lender your credit rating and they can then decide whether they will lend to you or not.

Don’t be misled however, as even if you have never missed a repayment in your life doesn’t guarantee that the lender will give you a ‘great’ credit score. Each lender is different in the way they apply the scoring system and one lender may apply a very different score for you compared to another. In this way, it could be regarded as somewhat of a myth that you even have a credit rating because every time a new lender produces one, it is very likely to be different from the last even though your financial circumstances haven’t changed.

Another thing to consider is profitability. Some lenders will specifically target low risk customers – those that have never missed any repayments before. Others wil target customers who almost habitually have late payment problems etc. They apply an interest rate to each type of customer and clearly those that can be regarded as carrying a greater risk of lending to, will attract the highest interest rates. It is the interest rate that carries the level of profit for the lender.

So just because you have been turned down by one lender may not necessarily mean that you may be turned down by them all. It may be that you simply don’t quite fit their credit rating profile for their profitability model.Tenant loans and unsecured loans are affected greatly by this type of financial modelling, but don’t let one bad experience put you off from applying. Just be honest with yourself about your credit history and your current circumstances and try to approach a broker or lender that concentrates their energies on in this area. Happy hunting!

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Your credit rating is different from your credit history although both may have a part to play in whether your application is accepted. This article looks at how the system works.

Andy Silk is FinanceGuru for FeelGoodLoans.co.uk, specialists in unsecured loans for tenants, loans and mortgages for UK homeowners and business owners.

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