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How Credit Scoring And Loans Interact
By Michael D. Strauss
When you're in the market for a personal loan, one of the biggest factors that will influence the kind of deal you can get is your score. Most people have heard of scoring, but not all of us really understand what it is and how it interacts with financial products such as loans.

The process of scoring is made possible by companies called reference agencies, who collect and store information on the financial activities of all of us. Details such as applications we've made, searches carried out on us, payments we've missed or made late, and debts that we've not paid are all held on what's known as a file. Every one of us who's made contact with the financial services industry will have a file dedicated to us.

When you apply for a loan, the first thing the lender will do is request a copy of your file from one of the reference agencies, so that they will have the bare facts of your financial and history available to them to help them come to a decision. It is not however, contrary to popular belief, the agencies who decide whether you're a good or bad risk, and they have no direct control over your score.

This will be determined by a set of scoring criteria drawn up by the lender, of which your file is only a part. Each kind of entry on your file will be given a 'weight' in the scoring process, along with other information you gave on your application form such as income, residential status, marital status, length of time in employment, and so on. The importance given to the various factors will vary from lender to lender. For example, one company may place great importance on being a homeowner with a high income, and may not to be too concerned over previous late payments or arrears. In contrast, another company may not be concerned about where you live, but will take a dim view of any previous black marks on your file, however inconsequential.

Once all this information has been weighed up, the lender will be left with an overall score. If this score is below their minimum threshold for approving a loan, your application will be rejected. If your score is excellent, then you will likely be approved at an attractive rate of interest. The majority of people will, naturally, fall somewhere between these two positions, and will be offered a loan at an interest rate that reflects their individual score. By law, the interest rate that two thirds or more of applicants can expect to be offered



is the one that should be given greatest emphasis and prominence in any advertisements or marketing material.

If you find that your score is too low to get a decent loan deal, then you can look into ways of improving your rating. This is a whole new subject in itself, but suffice to say that you should be wary of any companies who claim to be able to dramatically improve your rating. This is in many cases unrealistic. What you can do though is to get hold of a copy of your file yourself, for a minimal fee, and check that all the information on it is correct. By doing this, you'll at least be getting your loan application off to a proper start.

Article Source: http://www.articlemap.com

Michael writes for Loan Vision, a loan comparison and information site covering secured loans, personal loans, and bad finance.

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