Bad Credit Loans

A guide to getting credit with poor financial history


Understanding credit scoring

Understanding Credit Scoring

When you apply for a loan, be it a bad credit loan or any loan, the lender is going to review your credit history, and your credit score. The more you know and understand about your credit report and credit score, the better armed you are, and in a better position to be granted the loan.

Your credit report is made up of a few sections, one is details about yourself, name, address, date of birth, etc.

There also is a section that shows searches or enquiries on your credit, those that have viewed your credit report.

These also is a public records section that will show any bankruptcies or County Court Judgements/CCJ's.

And the report will have a credit rating for you and a credit score.


What is a credit score

A credit score is a numerical value assigned to you and your credit report based on various factors. Different credit bureaus can use different factors in calculating a credit score, and they may also use different scoring methods.

A credit score is one thing a lender will use in consideration of granting a loan. The score represents a probability of you repaying a loan.

The higher your credit score, the better. If you have a low credit score, your odds of being granted a mainstream loan are low. Bad credit lenders look at credit scores, but may have a different scale or even a sliding scale of what they will accept in order to grant a loan.

There are a few components that make up what is used to determine your credit score.

Think of your credit score as a pie, a pie that is cut into various slices, not all the slices being equal.

Each slice of credit scoring pie carries a percentage or value with it that is what that slice contributes to your overall credit score.

Your Credit Score
  • Payment History: Your payment history makes up 35% of your credit score, the lion's share. This is why it is so important to pay your bills and accounts on time. If you are in arrears or have defaults, it will have a detrimental effect on your credit score.
  • Amounts Owed: This is the balances on your accounts, The more you owe, or how close you are to your credit limits, or maxing out a credit card, can lower your credit score. Using 25% to 33% of your available credit is ideal. Once you go past 50%, it can start to affect your credit score. Oddly enough, having two accounts each using 25% of the available credit can be worse than having four accounts at 25%. It will depend on how the lender views the accounts.
  • Length of Credit History: This is how long you have been credit active and have had a credit report. The longer you have been in the credit bureaus, the better.
  • Types of Credit: This part of your credit score is the types of accounts you have. A mortgage or car loan is viewed differently than a credit card, or a doorstep loan.
  • New Credit: New credit is the number of searches or enquiries that show up on your credit report. Each time you apply for a loan, the lender views your credit history, and these show up as searches or enquiries. Too many of these will lower your credit score as creditors think you are out applying for too much credit.

There are two types of searches:
Hard Searches: Hard searches are enquiries that are placed on your credit report when a lender views your credit. Too many of these can lower your credit score.

Soft Searches: Soft searches are searches such as when you view your own credit report, or when you check for eligibility for a loan. These searches do not affect your credit score.


What is a Bad Credit Loan

In reviewing our credit pie and the percentages assigned to each slice, you can see one thing that stands out is payment history at 35%. So one huge thing that can affect your credit score is how you repay accounts.

If you have arrears or have a habit of paying your accounts after the due date, it is going to have a huge impact on your credit score.

In addition, if you are close to your credit limits on any revolving accounts, such as credit cards, this, too, will also impact your credit score.

Also as mentioned before, having too many searches on your credit report will lower the score.

Let's look at how we can improve our credit scores.

My Credit Score

How can I improve my credit score

  • Pay your accounts on time: Since payment history is the largest percentage of your credit score, it cannot be stated enough to pay your accounts and bills on time.
  • Limit the number of searches: Don't be out applying for credit here and there. Use eligibility checkers if you are considering a loan prior to actually applying.
  • Review your credit report regularly: You want to review your credit report periodically for any errors or incorrect information. If there are any errors, you need to have these corrected.
  • Get on the electoral register: Being on the electoral register improves your credit score.
  • Close any unused accounts: If you have some open credit accounts you no longer use, close them. Be sure not to close your oldest account as it shows how long you have been in the credit bureaus, and this is a part of the credit scoring pie.

Let's move on to Chapter 5 and managing your finances.