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Most people living in the UK at the moment have, at some time or other, applied for credit in the form of a personal loan, homeowner loan or store or credit card and if you’re reading this article, then you are probably one of the millions of people who have some or all of theses types of credit, or at least have applied for them.

A large number of individuals do not bother checking their credit rating before they apply for a new loan and very often they will sit there and wait with their fingers crossed once they have completed the application, whether this is in their local bank or via an online application system, whilst a credit check is carried out to ascertain whether or not they will be granted the loan they want. Usually this process only takes a few seconds, but whilst you are waiting it can seem like hours (if you’ve been there, you know what I mean!)

If the applicant is accepted for the loan or other credit agreement they applied for, then all well and good and little more thought is ever given to the process, but in the situation where the application is rejected, or offered at a reduced loan amount or higher interest rate, then it can be of great concern and can cause problems for the person who applied for the loan.

Most individuals are unsure of just how their credit rating works and the process which lenders use to assess a person’s ability to repay a loan, their credit rating is their credit rating and nothing can be done about the situation to change the facts which stop them getting a loan. But with a little understanding of how lenders check loan applicants and a little care and management of their credit file, it is possible for an individual to improve their rating in order to be accepted for a loan or card in the future. 

There are several factors which a bank or building society will use to assess whether or not a person is acceptable for a loan, credit card or homeowner loan and although most of them will use the same information, many lenders will use it differently from others, with one lender placing more emphasis on one area than another, for example. The main areas for them to consider are, firstly basic information such as employment status, job security, homeowner status and income and affordability information. Other loans and credit agreements will also be taken into account, both on how much has been borrowed, what the monthly repayments are and also how the account has been handled, i.e. whether there have been any missed or late payments, or if the account is in arrears.

The lender will also then look at the applicant’s credit file. This can be through one of the three major credit rating companies; Experian, Equifax and Callcredit, each of whom keep an up to date record of a persons financial details, usually over a six year history, although in some cases this can go back further than this.

A person’s credit file contains details of their name, address history over a six year period, other people living at that address (although this information will not affect a person’s individual rating) and details of any existing loans, credit cards, homeowner loans or other credit agreements, along with a payment history of these credit items, showing if an account is up to date, in arrears or default, or has had any missed payments. If a person has had any County Court Judgements (CCJ’s), bankruptcies or Individual Voluntary Arrangements (IVA’s), these will also show up on the credit file.

Every time someone applies for any type of credit (including things such as mobile phones on a monthly contract basis) a credit score is carried out by the provider and this process leaves a “footprint” on that person’s credit file, which can affect their overall rating and therefore ability to be accepted for a new loan. if a new lender sees several credit checks for loan applications made by different companies over a short period of time, whether or not these have been accepted, rejected or not been taken up by the borrower, this can set alarm bells ringing for the new potential lender and have an adverse effect on the likelihood of that person being accepted for a loan.

As we have already said, different lenders use an individual’s information in different ways and also use different credit reference agencies, which can affect the outcome of the credit scoring process. So just because a person has been rejected for a loan with one company, does not necessarily mean that they will also be rejected by a different lender. Although the information held by credit reference agencies should be accurate and up to date, in many cases this is not the case and it is a worthwhile exercise to obtain a copy of your credit file from each of the main companies before applying for a new loan.

These can be obtained, for a fee of £2, by writing to each of the companies, or by applying online. If your information is inaccurate, or in some cases completely wrong, this can be updates and amended, although you may have to provide evidence to show that your record has been cleared and this can then take up to a month to show up on your credit file.

So if someone has been rejected by the lender for a new loan or a credit card, what can they do to improve their rating and stand a better chance of being accepted in the future? Firstly, as we have said, they should obtain a copy of their credit file and check the information is correct. If there are any genuine arrears, defaults or County Court Judgements outstanding, these should be cleared up as soon as possible and a certificate of satisfaction obtained from the company in question.

It is also vitally important to keep a good track record of repayments on existing credit, so ensure that all loans repayments and credit card bills are paid on time and kept up to date. Even if you’ve had a terrible payment record in the past, for whatever reason, three to six months of consistent and up to date repayments can make a huge difference to your overall credit score. Just as someone with too many loans or credit agreements can be rejected for a new loan, someone with no previous credit at all may also be rejected, simply due to the fact that they have no track record for a new lender to assess them on and although it may sound ridiculous, sometimes the best thing to do is apply for a small loan or credit card elsewhere, just in order to be able to show a record of repayments.

Finally, the most important thing for anyone to do, whether they are thinking about taking out a new loan or not, is to maintain their credit rating at as high a level as they possibly can. Keep up to date with all repayments and repay existing debts as quickly as possible, do not just make the minimum payment on your credit card each month, clear as much of it as possible. Also continue to check your credit file with all three credit reference agencies every few months to make sure the information held on you is up to date and accurate.

By following these simple guidelines and only applying for credit when you actually need it, you credit rating may improve significantly and continue to do so the longer a good track record is maintained.