We all need to borrow cash from time to time, especially at the moment when money is tight, but it's not always easy to get credit. Banks and building societies these days are more choosey about their borrowers because they don't want bad debts to dent their bottom line.
Information on your credit file
Lenders take a number of factors into account when they consider your application for a loan, but your credit file is one of the most important. There are three main credit reference agencies - CallCredit, Equifax and Experian - and they all carry a version of your file. Your credit report contains all sorts of information about your financial history, including your mortgage, credit cards and any other loans.
When you apply for a loan, the bank or building society will use the details on your credit report, along with other information about your financial status, to give you a credit score. Contrary to popular belief, you do not have a single credit score and there is no credit blacklist. Each lender has a different way of calculating the score, so you could be successful with one bank even though you have been turned down by another.
How you can damage your score
Your credit score is a measure of your creditworthiness. If you have always managed your debts well in the past, you should not have too many problems arranging credit in the future. But if you have ever made a late payment on a loan, or missed a credit card payment, it will show up on your file and could adversely affect your score.
You will also end up with a poor credit score if you have ever encountered any more serious financial problems, such as bankruptcy or a County Court Judgement.
First time borrowers
Many lenders are wary of handing out funds to people who have never before borrowed any money. It sounds strange, but first time borrowers have no record, either good or bad, which makes it difficult for banks and building societies to assess their creditworthiness. So don't be surprised if you find it difficult to borrow money for the first time.
High interest rates
Many mainstream lenders shun borrowers with a poor credit score, but a number of specialist firms are willing to offer personal loans to people with a low score, though the price can be high. Yes, banks and building societies advertise temptingly low rates of interest. But the rates need only apply to 51% of successful applicants. In other words, almost half of borrowers are paying a different - probably higher - rate.
But if you have ever made a late payment on a loan, or missed a credit card payment, it will show up on your file and could adversely affect your score.
The high rates on personal loans for people with a poor credit history make it especially important to compare prices of to make sure you get the best deal. It's also important to take out a loan only if you are confident that you can manage your debts.
If you think you are likely to run into financial trouble, you should seek help from a free counselling service, such as Citizens Advice or Step Change.
Improve your credit score
There are a number of ways that you can improve your credit score. You should, for example, make sure that you are registered on the electoral roll and try to avoid frequent applications for credit as lenders are wary of borrowers that have previously been turned away. It's also a good idea to make sure that your credit file is accurate and up to date.
You should also demonstrate that you can control your finances by managing your debts carefully - and a personal loan for someone with a bad credit history can help. As long as you make your monthly payments on time and in full, you can prove to the lender that you have learned from any mistakes in the past.
MoneySupermarket's comparison service can help you find the right personal loan if you have no credit history or a bad credit record. The site compares personal from all the leading lenders, so that you can get the best deal for your circumstances.