When you’re trying to turn your financial situation around, the irony is that almost everything you need to do costs money.
- You may want to get a website built. Or you may need seed-funding to finance a business in its start-up phase.
- Your priority may be to buy a car so you can get to work further afield.
- Or perhaps you need to consolidate debt to get your finances in order.
It could be that your monthly income is perfectly adequate to support some ordinary additional borrowing, to pay for a family holiday or some home improvements.
But previous credit glitches on your credit record could be making it difficult now for you to apply for a loan in the ordinary way.
Comparing loan costs online
We all know it makes sense to compare costs before we take out a personal loan, or a “homeowner loan” secured against the value of our house.
Fifty-eight per cent of consumers spent time online trying to find the best deal possible when they took out their last unsecured loan, according to market researchers Mintel.
But did we spend enough time getting price comparisons?
Or did our price research actually damage our chances of getting the best rate?
Mintel says that for many British borrowers just getting a loan offer can be more important than the rate we’ll be paying.
More than half (54%) of borrowers aged 18-44 said it’s more important to be accepted for a loan than the rate of interest charged.
Shopping around can damage your interest rate
This seems like madness.
An extra 1% on the interest for a loan adds up to a lot over the lifetime of a loan. Why are we agreeing to it?
The problem is the effect of the credit checks carried out by banks and other lenders when you apply for a loan. Here’s how it works, according to an “indicative case study” from the TSB:
Lucy applies for a loan
She wants to borrow £8,000 for her first car.
- She finds a loan with an advertised rate of 3%. She applies and a hard credit check is carried out. The lender says she can’t have the 3% rate: she’s offered 9.9%.
- So she shops around and has a similar experience with three more lenders.
- The fifth lender she tries offers her 4.9%, which she accepts.
However, if she hadn’t accumulated four hard credit checks, from her four unsuccessful applications, she would have been eligible for a rate of 3.1% from the fifth provider.
She’s going to be paying an extra £375 in interest over the life of her car loan.
How credit checks affect your score
If you’re young, and haven’t had a chance to build up a long credit history, or if you’ve got some negative ratings on your credit score, just applying for credit could damage your rating further and make it impossible for you to access lending.
When you make a formal application for credit you authorise the lender to check your personal credit rating when you fill out the application form.
Each of those credit checks leaves a hard “footprint” on your credit score.
To lenders, multiple applications for credit create a picture of someone who’s a bit desperate for money. (The classic out-of-control borrower has multiple credit cards, all with maximum balances.)
Unsuccessful applications create an additional negative rating.
Use “soft checks” on your credit score
The answer is to pre-check your eligibility with “soft checks” that don’t leave a footprint, before you decide on the best deal you want to make a firm application for.
How do make sure you’re getting enough quotes to make a reasonable comparison, and that you’re only triggering “soft checks”?
Fortunately there are now online price comparison tools that do exactly that.
No-footprint credit checks
We’ve chosen Monevo to partner with. Their service is free. You fill out one enquiry form and Monevo sends your details to the relevant lenders amongst the 20+ banks and lenders they work with. You get personalised loan offers back, with real rates, within two minutes. And then you can decide which one you want to make a formal application to.
It’s not guaranteed that you’ll get the best rate available from any lender in the market, because Monevo works with a “panel” of partner lenders.
But the automated service takes the legwork out of submitting enquiries to a multiple lenders. And it’s the time commitment that prevents lots of borrowers from hunting out a better deal and tempts us to just go with what we’re offered.
That, plus the concern that we might be damaging their credit rating by triggering hard checks.
Loans for borrowers with imperfect credit scores
- Monevo sources personal loans, car loans, short-term loans, bad credit loans, debt consolidation loans, and loans secured against your home.
- If your poor credit rating needs to be supported by someone with a stronger credit record they can also find you a Guarantor Loan.
- The only drawback you may find is that the automation of the service doesn’t allow for personal intervention and making allowances for exceptional circumstances.
- But you should be able to address those issues by looking at your own credit score directly.
How can I check my own credit rating?
You don’t have one single “credit score.” Details of your credit history are collected by three different commercial agencies in the UK. Infuriatingly, different credit providers report to each of the agencies, and different lenders use different credit reports. So you do need to check your ratings with all three agencies.
You can check your own credit ratings for free, at any time, without affecting your credit score. Your own checks count as “soft checks” and aren’t visible to lenders.
The three UK credit ratings agencies are Experian, Equifax and TransUnion (formerly CallCredit). Don’t feel pressured to sign up for their monthly credit report services.
Or you can use CheckMyFile’s free trial, which checks all three. (Remember to cancel your subscription.)
What counts as a “poor” credit score?
It seems illogical, but each of the credit agencies uses a different scoring system:
Experian
- Top score: 999
- Over 960 = “excellent”
- 721-880 = “fair”
- Under 721 = “poor”
Equifax
- Top score: 700
- Over 465 = “excellent”
- 380-419 = “fair”
- Under 380 = “poor”
TransUnion
- Top score: 710
- Over 627 = “excellent”
- 566-603 = “fair”
- Under 566 = “poor”
What affects my credit score?
Experian, the largest credit agency, is also the most open about its scoring system.
What Experian counts against you
- Default on a debt: -350 points
- Country court judgement (CCJ): -250 points
- (notes stay on file for 6 years)
- Missing a monthly credit card bill: -130 points
- £15,000 debt on credit card: -50 points
- Using more than 90% of credit limit (even if repaid each month): -50 points
- Low credit card limit: £250 or below: -40 points
- Opening any new credit account (phone contract / utility supplier / monthly car insurance premiums…) within 6 months of another credit account: -40 points
What improves your Experian credit score
- Keeping credit card below 30% of your credit limit: +90 points
- Clearing your credit card balance: + 60 points
- No new accounts opened for 6 months: +50 points
- Registered on electoral roll: +50 points
- Being given a credit card limit about £5,000: +20 points
What affects your TransUnion credit score
Missing a monthly credit card bill: -40 points
The amount lost will vary by individual. For example, habitual late-payers could lose fewer points per missed payment than someone who is missing a payment for the first time.
“The difference is that a significant behavioural change could indicate financial difficulties,” says TransUnion.
What to do about a bad credit rating
- If you’re refused a loan you can ask the lender why.
- If they blame your credit score you can legally appeal for them to consider your case on an individual basis, rather than relying on an automated system.
- You can ask for incorrect information to be corrected: for example if you’ve closed a mobile phone account but the provider hasn’t cancelled the direct debit.
- If there’s negative information that is accurate but there is a reasonable explanation for it (you missed a payment because you were in hospital) you can ask for an explanatory note to be added to your credit report, which lenders will read.
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