For many lenders, your credit history - simply put, your track record of repaying your debts - is one of the most important factors to be weighed up when considering whether to offer you a home improvement loan.
For that reason, borrowers with a bad credit score are often nervous when applying for loans to fund things like loft conversions, new windows or other improvements to living spaces. However, as with many things, the reality is a little more complex. In practice, responsible borrowers may still be able to get a home improvement loan, even with a bad credit score.
In this article, we’ll look at how a credit score is actually calculated, before looking at ways to access credit that apply even if you have a bad credit score.
This article is fairly detailed, but if you’re just looking for a flexible personal loan of £1,500-7,500, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.
What is a bad credit score?
Lenders don’t have a crystal ball: when writing a new loan, they don’t know for sure whether the borrower will repay it. So, when evaluating a potential borrower, they make some educated guesses, which are based on:
Your current circumstances
Do you have lots of different debts outstanding?
Are you on the electoral register?
Do you have a high credit utilisation ratio? (To simplify - have you maxed out your credit cards?)
Your track record
Have you successfully paid off debts in the past?
Is there anything in your recent past that suggests difficulties with borrowing, such as CCJs?
This information is consolidated by the UK’s three credit bureaus (Equifax and Experian are the best-known), who sell that data on to would-be lenders. They’ll also provide the information to you when asked, usually simplified into a score. However, there’s one important thing to bear in mind:
There’s no universal score
The three credit bureaus each score using a different scale. So a good score with Experian is more than 881 (1), whereas with Equifax it’s anything above 420 (2).
More interestingly, lenders aren’t actually looking at your score when they carry out a credit check. When you apply for a loan to pay for home improvements, they’ll look at the underlying data and make their own decision.
One lender might want people who don’t have existing credit card debts, while another might prefer borrowers who have a low credit utilisation ratio. So a score is just an indication, based on the credit bureau’s criteria. A perfect score doesn’t mean that you’re eligible for every loan, and a bad score doesn’t mean that you won’t be able to access credit everywhere.
Why traditional lenders focus on track records
For many lenders, the track record is extremely important: lenders normally want to see a history of repaying debts in full and on time.
Because that track record is so important, some promising borrowers can struggle if they haven’t built one up yet. For example, it might be that you’re new to the UK, or simply haven’t needed a loan before.
Unfortunately, many traditional lenders struggle to take this into account, which has led to a new kind of lender that bases lending decisions on affordability, based on Open Banking data - more on that later in the piece.
What credit score is needed for a home improvement loan?
There’s no specific number that all lenders use as a minimum. Remember that the credit score you see is just a reflection of the information that credit bureaus hold on you, and it’s not the only criteria on which they base their decision.
Don’t forget that lenders are businesses, with a P&L, and in general they want to write loans that are profitable. Strangely, in some cases, a loan that’s a “sure thing” might not actually be profitable, because the lender might not be able to charge a high enough rate.
So, as a rule, while you may well still be able to get a loan with a bad credit score:
You’ll have fewer options to choose from when compared to a borrower with a higher credit score,
You’ll almost certainly have to pay a higher rate of interest, and
You’re unlikely to be able to borrow as much.
If you have a track record of missed payments, defaults and CCJs, then you’re likely to have a credit rating falling into the category of “very poor”, and will find it very difficult to access credit. But for other borrowers, it’s often a question of interest rate and loan amount, with a more limited choice.
As the Citizens Advice bureau (3) explains:
Because creditors have different systems to work out credit scores, even if you’re refused by one creditor, you might not be refused by others.
How can I get a home improvement loan with a bad credit score?
Because lenders have different approaches to credit scores, the key thing to do is to shop around.
However, it’s important to understand the difference between “soft” and “hard” credit searches, which are carried out when you make a loan application. A hard credit search leaves a trace on your credit history, which other lenders can see, and too many of these can act as a red flag to other lenders. So, unless you’re serious about a specific loan and have done your research, it’s usually best to avoid these.
However, many lenders - including Koyo - will carry out a soft search when giving you a quote, and lenders should always make it clear when they’re carrying out a hard quote.
If you think you’re likely to have difficulty accessing credit for home renovations or improvements, a good place to start is an Eligibility Calculator, such as this one offered by Money Saving Expert. It gives you an estimate of which lenders are likely to accept your application so that you can go straight to the lenders who may be open to you.
There are also some simple steps you can take to improving your credit score - there’s a good guide here.
One other way to access a home improvement loan is to consider a secured (rather than unsecured) loan. These loans are usually “secured” against the value of your home, meaning that a lender can take control of your property if you fail to make repayments.
That means it’s safer for the lender, who may be willing to take a risk on an otherwise risky homeowner and might even be prepared to loan larger amounts or for longer periods of time. However, secured home improvement loans are a big risk for the borrower, and this sort of loan is something to consider very carefully. Your home is at risk if you fail to make full repayments.
Before we finish though, there’s one more type of loan to be aware of: an Open Banking loan, which isn’t based on your credit score at all!
How Open Banking loans can help
Open Banking lenders like Koyo aren’t concerned with what other people - credit bureaus, in this case - say about you. Instead, they use Open Banking to verify your bank data and check that the total amount you’re borrowing is affordable for you.
In a nutshell, Open Banking lenders use technology approved by the Financial Conduct Authority to securely view applicants’ bank account data.
What do Open Banking lenders look for?
Instead of only looking only at your credit history, Open Banking lenders look at your real, verified income and outgoings. By doing this, they’re able to get a much clearer picture of whether you’ll be able to meet the monthly payments for a given loan.
Believe it or not, credit bureaus aren’t able to accurately verify this information, so accessing bank data in this way means that Open Banking lenders may be able to make better-informed lending decisions. The benefit for borrowers is that they may be eligible for a loan even if they don’t have a good credit score, so long as the monthly repayments are affordable.
What to consider when getting a home improvement loan with a bad credit score
To summarise, if you have a bad credit score and don’t want it to get in the way of taking out a home improvement loan, here are some things to consider:
Your credit score is often an important factor when it comes to getting approved for a loan, but it isn’t the only one.
It’s worth shopping around (without making applications that lead to a hard credit search) to understand your options - an eligibility calculator can be useful.
An Open Banking lender - such as Koyo - is interested in affordability, rather than focusing on your credit history, so that can be a good option to consider.
You can often improve your credit score with just a few simple steps.
However, as a borrower with a bad credit score, you’re likely to find it harder to access the best deals, and will usually face higher interest rates.
If you want to know more about how home improvement loans work in general, we’ve put together a useful guide on the subject, as well as articles on how to pay for a new roof and how to pay for a new kitchen.
And if you’re looking for a flexible personal loan of £1,500-7,500, you can take a look at our loan calculator or make an application at www.koyoloans.com. Representative APR 27%.