Learn / Part 3 · Inside the Financial System
Credit: How Lenders See You
How do lenders decide whether you are a good risk?
In brief
Lenders look at income, existing debt, history and sometimes collateral. A credit score or rating summarises how reliably you have repaid. Seeing yourself as they do lets you improve what they see.
Key ideas
Capacity and willingness
They ask: can you pay (income and commitments), and will you (history)?
Make an insight card →Utilisation signals stress
Using most of your card limit can look risky even when you pay on time.
Make an insight card →Collateral lowers the rate
Secured loans cost less because the lender has a fallback, which becomes your risk.
Make an insight card →Try it
Borrowing capacity & debt-to-income
Lenders look at how much of your income is already committed to debt, and how much of your credit you use. See your numbers the way they do, then add your own safety margin.
Open the full page: formula, variables, worked example and cautions →
Red flag
Being offered much more credit than you asked for.
Ask before you sign
- What do you look at to set my rate?
- What happens to my record if I miss a payment?
Do this week
Check your credit report for errors.
Try it · 10–45 minutes
Calculate your debt-to-income ratio and card utilisation.
See it in a life
Cases that bring this chapter to life
Pause and reflect
Private to this device. Nothing is sent anywhere.
Words worth knowing
- Credit score
- A number or rating that summarises how reliably you have borrowed in the past. Different countries and agencies use different methods.
- Debt-to-income ratio (DTI)
- Your monthly debt payments divided by your monthly income. Lenders use it to judge how stretched you are.
- Credit utilisation
- The share of your available credit limit that you are using. High utilisation can signal stress to lenders.
- Collateral
- An asset pledged to a lender, which the lender can take if the loan is not repaid.
- Secured loan
- A loan backed by collateral. Rates are usually lower, but the lender can take the asset.
- Unsecured loan
- A loan not backed by collateral, such as a card or personal loan. Rates are usually higher.
Companion notes written for this website, based on the topics of Chapter 10. They explain ideas and do not reproduce the book. General information, not personal advice.