The Influence of Credit Scores on Loan Approval: A Quick Guide

As part of our educational campaign to promote credit confidence, this blog focuses on the important role credit scores can play in loan approval. While credit scores might seem complex and mysterious, understanding their influence on lenders can empower you to make more informed financial decisions and secure better loan terms.

If you're new to credit, we recommend our introductory blog post. If you’re familiar with credit scores, let's dive in.

A key factor 

When you apply for credit, lenders consider various factors to decide whether to lend you money, how much and at what interest rate. One of the most significant factors is your credit score. This numerical value gives the lender a quick way to assess your risk as a borrower based on your creditworthiness.

High score benefits

High credit scores show you've consistently made repayments on time and managed your debt responsibly and effectively. This can make lenders more confident about offering larger loans for big purchases like a home or car.

High scores could also lead to lower interest rates — the cost of borrowing — which can save you money over the duration of the loan. 

Low score costs

Low credit scores may indicate a history of late payments, defaults or other risk factors that could make a lender more cautious. They might reject your application, you may be approved for smaller amounts, or you could be charged higher interest rates to help offset the increased risk the lender is taking on you not making the repayments. 

Credit score trends

Lenders don't view your credit score as a standalone figure; they also pay attention to how it changes. This is known as your credit score trend, and it can provide additional insights into your financial behaviour and reliability as a borrower.

A score that steadily improves indicates you're managing your obligations well and you might be offered more credit at better rates. 

A downward trend in your score suggests you're struggling to manage your debts, and a lender might approve only smaller, more costly loans to offset their increased risk.

Other important factors 

Your credit score isn’t the only influence on a loan decision. A steady income from full-time employment can help you secure larger loans at better rates as it suggests you have the financial means to meet your repayment obligations.

Frequent job changes or periods of unemployment might reduce your chances or lead to higher charges.

If you already have significant debt obligations, lenders may be concerned about your ability to handle additional repayments. 

In South Africa, the National Credit Act requires lenders to analyse your income and expenses to ensure you can afford additional debt before they approve your application.

Take control

Your credit score isn't set in stone. It's a dynamic number that changes with your financial behaviour. It can influence whether you're approved for a loan, along with its terms, interest rate and amount. 

By monitoring your credit score and taking steps to improve it, you'll go a long way to enhancing your borrowing power.

Learn more about how you can build your credit confidence with Credit Check, Credit Report and Credit Score.