How your credit record affects the loan you get

Every time you take out credit, whether it’s through a credit card, overdraft, loan or mortgage, the details are recorded on your credit report along with your payment history. This helps lenders make decisions about whether to lend to you in the future.

What is a credit record?

You credit record or credit report contains the history of how you manage your personal finances, especially your debts, and monthly bills. Among the things it includes are:

• Personal details like your date of birth, address and previous addresses

• Whether you are on the electoral roll

• All your active credit agreements and closed agreements from the past six years

• Transaction history for each account including what you owe and any missed payments

• Any defaults, county court judgements or bankruptcy notices

• Any active debt management plans or individual voluntary arrangements

The information is securely held by independent organisations called credit reference agencies (CRA). There are three main ones in the UK – Experian, Equifax and TransUnion.

What's the difference between a credit report and a credit score?

A credit report is a file containing information about your credit history. Your credit score is a score given to you by a credit reference agency, which tells you how your credit report might look to lenders - the higher the score, the better it looks. However, different lenders assess potential borrowers in different ways.

What information is not included in your credit report?

Although a credit report contains sensitive and personal information about your finances, it does not include details like:

• Current account information (unless you have an overdraft)

• Savings account information

• Your salary

• Student loans

• Criminal record

• Medical history

• Parking or driving fines

• Council tax arrears

• Information about gender or ethnicity

How to improve your credit record

How does your credit record affect your loan application?

When you apply for a loan, the lender will take a look at your credit history to decide what interest rate to offer you based on how risky it thinks you are as a borrower. The more risk the lender thinks there is that you won’t be able to pay back the loan the higher the interest rate you will be offered.

It will also ask you about your income and your existing financial commitments. You’ll have to provide evidence of these.

If you're applying for a joint loan, it will check the same details for the person you are applying with.

Does your credit history affect the cost?

Lenders usually use your credit record to decide what interest rate to offer you on a loan. This is called risk-based pricing.

When lenders advertise their loans they show a representative APR (annual percentage rate). At least 51% of borrowers will get this rate or lower while the rest will pay a higher rate. The rate you will actually get depends on your circumstances. 

The best rates are typically offered to borrowers with the strongest credit records. If you have a history of missed payments or CCJs you are deemed to be a high-risk borrower, so you are likely to be offered a higher interest rate if you’re approved for a loan.

What happens if you apply with bad credit?

Having bad credit doesn't always mean you won’t be able to get a loan. It can just mean that you'll be offered a higher interest rate. You may also be offered a smaller loan than the one you originally applied for. Read more about getting a loan if you have bad credit.

Before you apply for a loan

The first thing you should do before you apply for a loan is to check your credit reports. You  should get them from all three credit reference agencies, which you can do for free, as they may hold different information. 

By checking them you can make sure there are no mistakes on your records. For example, old accounts that should be closed being listed as still active, incorrect personal details like your address or financial associations with people you are no longer connected to. 

You should report any mistakes to the credit reference agency and the relevant lender so they can be removed.

This is also a good way to check whether anyone has fraudulently taken out credit in your name, which indicates that you have become the victim of identity theft as well as potentially affecting your credit score.

If you are worried that poor credit could stop you from being accepted for a loan you could look into bad credit alternatives. Or you could take some time to improve your credit rating and apply for a loan at a later date when your chances of getting a loan or a more affordable one have improved.