How Your Credit Rating Affects The APR Offered to You
Growth Industry
With the growth of personal lending came credit rating, the industry’s gauge for its potential customers. Data is stored on everybody who has held a credit card, had a mortgage and even who pays utility bills. That data is used to assess whether you are trustworthy to lend money to or to see if you are a liability? Your credit rating holds the key to how much interest you will be charged when you take out a loan.
Credit where credit’s due
There are two main credit rating agencies in the UK: Experian and Equifax. It is their task to collect data on everybody who conducts financial transactions on credit and to compile a record of each person’s performance and subsequently to assess the risk of lending money to them.
When a financial company receives your application for a loan they will run a check with one of the credit rating agencies to see how high your credit rating is. They will then compare that rating with their own criteria to calculate what apr they will charge you. If you have missed payments on your mortgage, your utility bills, or credit cards you will be considered a risk. If you have defaulted on loans of any kind in the recent past you will have a poor credit rating and you will either find it hard to get a loan or you will be charged very high interest. The lender will do anything they can to make sure they don’t lose money on you.
Neighbours
Even your postcode and whether you are on the electoral register are taken into consideration by the credit rating agencies. If you live in a neighbourhood where many people have defaulted on their loans it will adversely affect your rating, even if you have conducted your own finances impeccably.
The fact you are on the electoral register means you are intending to stay at your current address and it helps prove you are who you say you are.
I’ve never had a credit card
If you haven’t actually got a comprehensive credit history you are also likely to have a poor credit rating because the rating companies have no information on which to judge you, so they categorise you as a high risk.
There must be some mistake
If you are turned down when you apply for a loan you are entitled to ask why and it may be the lender will state your credit rating was low. You can find out what your credit rating is by going to a number of credit rating/checking websites on the Internet.
For a small fee they will provide you with your details. If there is a mistake you may have the chance to appeal, and if there is a detail that is highlighted on your file, like a failed business, you can add your own explanation of the circumstances surrounding that incident. This may not actually adjust your credit rating, but it will allow lenders to understand more about you and get a more accurate picture on which to asses your loan application.
Not all doom and gloom
You can help improve your credit rating quite easily by ‘playing the game’: if you take out a credit card and pay off substantial sums each month then you will soon raise your credit rating in just a matter of months. This, however, is not advisable if you are not strictly disciplined with your monthly finances as you can get into a real mess with debt on the cards!
Fine line
At the end of the day it appears there is a fine line between being an acceptable risk and hence getting offered a reasonably low interest rate and being an unacceptable risk who gets penalised by the apr on a prospective loan.
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