Consolidate expensive debt to reduce interest, lower payments & stop late fees

Access the money tied in your home to get great consolidation loan rate from leading UK lenders

How my credit rating affects the cost of my borrowing?

There are lots of factors that affect the interest rate you pay on your borrowing. Your employment status, your income and your assets are all key things that contribute to your credit worthiness. However, there is one other important factor that significantly affects the rate you will pay on mortgages, loans and credit cards.

Your credit rating is determined by your record of managing your debts and your general financial behaviour. It is one of the most important factors in determining whether a lender will lend to you and at what interest rate.

But what is your credit rating? How is it worked out? What does it mean? And why does it affect the cost of your borrowing? We answer these questions and more.

What is your credit rating?

Everyone has a credit rating. This is comprised of a range of information pertaining to your financial behaviour. Credit reference agencies (Experian, Callcredit and Equifax) hold this information on your credit file, and it includes information such as:

  • Your payment history on loans, credit cards and other debts
  • Your personal and address details
  • Whether you are on the Electoral Roll
  • Any credit searches that have been requested by lenders
  • Any defaults, County Court Judgements or late/missed payments

Why is your credit rating important to a lender?

When deciding whether to extend credit to you, lenders take a variety of factors into account. These include:

  • The information that you provide on your application
  • Any existing information the lender has on you (for example if you already hold another account with them)
  • Your credit information from one of the UK’s three credit reference agencies

When you apply for a financial product, the vast majority of lenders will ‘credit score’ your application. Scoring systems vary from lender to lender and are never published. This means that different companies will accept different applicants and that just because one company rejects you it doesn't automatically mean another will.

Lenders take all the above factors into account and then decide whether they will lend to you. And, if they will lend to you, they use this information to determine what interest rates they will offer.

In simple terms, a good credit rating will show that you have responsibly managed credit in the past. You will have a good record of paying credit cards or loans and you will have no late or missed payments. You will generally be on the electoral roll at your address and you will have no adverse credit such as defaults or County Court Judgements.

How your credit rating affects the cost of your borrowing

Lenders much prefer to lend to people with a good credit rating. Statistically, if you have been responsible with debt in the past you are likely to be responsible with it in the future. If you have a good credit rating then a lender believes that you are a good risk and that you won’t default on your payments. That’s why they are happier to lend to you and to offer you their best interest rates.

Conversely, if you have experienced credit problems in the past, a lender may be more cautious about lending to you. You are a higher risk in their eyes and so they may charge you a higher interest rate to reflect the fact that you are statistically more likely to default on your debt.

Don’t lenders offer the same rate to all applicants?

Increasingly, lenders determine the interest rate that you will pay based on your perceived risk. It is not the case that either you are accepted for a loan or credit card, or you are not. You may be accepted but pay a different interest rate to another applicant for the same credit facility.

A lender does not have to give you the interest rate they are advertising or that you see in best buy tables on comparison websites. The rate advertised is called the ‘representative APR’ and it only has to be offered to just over half (51 per cent) of people applying for the product.

Most personal loan rates are 'representative'. This means that the Annual Percentage Rate (APR) depends on your credit score and credit rating. You may be offered an interest rate that is higher and this is called your personal APR.

Similarly with credit cards, if your score is too low for the deal that you wanted, you might be accepted for the card but sent a different product.

Why a good credit rating is important

As we have seen above, your credit rating plays a large part in determining what interest rate a lender will offer to you. And, the benefit of maintaining a good credit rating can be significant.

For example, the worst case scenario may be that a poor credit rating means that your application for a mortgage, personal loan or credit card may be refused.

If you are accepted, you could pay a significantly higher interest rate than someone with a good credit rating. For example, on a £10,000 personal loan over five years, if you are charged a 5 per cent higher interest rate it will cost you around £1,500 more.

You should also bear in mind that your credit rating does not only affect the price of new financial products. Your existing lender may also increase the interest rate that you are paying if your credit rating deteriorates. Maintaining a good credit rating is therefore vitally important whether you are considering borrowing more money or not.

Improving your credit rating

There are a number of ways that you can improve your credit rating in order to benefit from lower interest rates on your borrowing. These include:

  • Managing your exiting debts more responsibly. Make sure that you make all your payments on time and pay at least the minimum amount
  • Checking your credit report and correcting any mistakes
  • Get on the electoral roll if you are not already
  • Add a ‘notice of correction’ to your file to explain any specific issues on your credit file

Share/link this page, so more people become better at managing their debt. Also if you need a secured debt consolidation loan, fill this form.