Since their hard-earned money is at stake, virtually all lenders are very cautious about granting loans to people. The borrower's capacity, character and capital are checked by the lender. The lender determines the borrower's history and whether the borrower has a good or bad credit history. The credit scoring method is generally used for this purpose. Large lending companies more often rely on a credit rating score to help make loan decisions.

Through the credit-scoring method, which is based on statistical analysis of applicant characteristics, lenders determine the applicant's qualifications for credit. This information is collected from the credit application and credit reports. The factors which determine the likelihood of the repayment are identified and evaluated. Certain factors like on-time payment of credit card bills are given more weight than others. Then points are awarded according to these factors. The total number of awarded points results in the credit score, and it helps tell lenders the likelihood of borrowers paying back the loan and making the payments on time.

Most people think that a credit score over 680 is good. A score over 700 is considered excellent.

A bad credit history makes it difficult to get an unsecured loan. Also, since lenders want to be compensated for granting high-risk loans on bad credit, interest rates will be higher. Hence, it is better to have a higher score. But due to high competition among lenders, there are still many lenders who grant loans at the lowest rates possible, even in the case of bad credit.