When you decide to apply for a loan, lenders don’t spontaneously give you the funds that you need. When you are applying for a job, there are certain requirements that you need to comply with. Lenders will run through each one of them to check if you qualify for their loans.
One of the factors that lenders look at when deciding whether or not to give you credit is your credit report. You can think of your credit report as your financial CV, which contains some information that can either make or break your loan application.
To further understand this process, we’ve highlighted some relevant information why lenders pull your credit and what exactly they’re looking for.
What Is a Credit Report?
A credit report is a detailed rundown of your credit history that is compiled by the credit reference agencies (CRAs). In the UK, the three CRAs are Experian, Equifax and TransUnion. Once you apply for any credit, you authorize potential credit providers to have access to this report.
It’s essential to note that credit providers are not limited to banks, credit card companies, and online lenders. They also include providers from mobile telephone services, if you have set up a phone contract, and mail-order companies. Even employers and landlords can check your credit report if they wish to.
Generally, a credit report may consist of your personal information, a record of your credit accounts, data from people who are financially associated with you, and public records, such as bankruptcies and house repossessions.
These are the things that lenders or creditors may see in your credit report, but what do they mean and how can they affect your chances of getting approved?
Reasons Why Lenders Pull Your Credit
You can always expect lenders or creditors to pull your credit whenever you apply for a loan. Before they give you rate information, they will look at your credit report first. The following are the important reasons they have to do so.
Minimize Credit Risk
Lenders want to minimize credit risk as much as they can. Credit risk is the possibility of loss that results from a borrower’s failure to pay back the loan. By looking into your credit report, they would have an idea of how responsible you’ve been with your previous credit.
Assess Creditworthiness
To lessen the risk of a default, lenders would have to assess your creditworthiness. If a lender is confident that you will honour your debt obligation on time, then you are considered as creditworthy. They determine your creditworthiness by looking at several factors in your credit report.
Determine Your Interest Rate
Lenders use your creditworthiness to not only decide whether you get that loan or that new credit card, but also to determine what interest you’ll have to pay. If a lender views you as creditworthy, then they are most likely to give you lesser fees, better interest rates and better terms and conditions.
The Factors Lenders Look For In Your Credit
There are several factors that lenders look for in your credit report, and each might affect your borrowing options. However, it’s worth noting that they may vary from one lender to another.
It would be best to equip yourself with some of them so that you will know how to get better options if you need to borrow money.
Credit Score
Lenders use your credit score to determine the risk of loaning money to you. If your score is higher, lenders will view you as creditworthy. But, they have set a threshold level for credit scoring. They may charge you higher interest if your score is below the threshold, or worse, they may decide not to lend it to you at all.
Note that lenders may use different systems for calculating your score. Thus, you might get approved by others even if one creditor refuses you. If there’s anything wrong on your credit report, you can also correct it to improve your score.
Repayment Habits
Your credit report shows your repayment habits. It’s also the most important factor that lenders look for in your credit. If they see that you always repay on time and in full, then you have higher chances of getting more credit. After all, lenders don’t want to get paid late, and missed payments are red flags to them.
Application History
Every time you apply for a financial product, like a credit card, it is documented in your credit report. If you make frequent and multiple credit applications, lenders might view you as desperate for credit. It can be another red flag for lenders since they would presume that you are overburdened with multiple debts and might struggle with another one.
Takeaway
There are other different aspects of your financial situation that can significantly affect your credit score, and your borrowing options in general. But, as long as you handle your credit responsibly, then you don’t have to worry about lenders pulling your credit. It would also help to check on your credit report as often as you can to fix any errors or repair your credit.