If you’ve ever shopped around for a personal loan, you probably found a range of interest rates from different lenders. Have you ever wondered how they get to the rate you were offered?

When you get a personal loan, the interest rate is determined by your risk profile. That’s a banking term for a range of factors that affect your eligibility for credit. In short, this is a measure of how likely you are to pay your debt. It’s a picture that’s formed by looking at different parts of your financial record and current circumstances.

Factors affecting your risk profile

Your risk profile includes details about your financial history, your current job and salary, and your credit report. You won’t be able to improve any of these factors overnight – finding a different job with a better salary, for instance, takes work and planning on your part, and then you still need the right opportunity at the right time.

But you can start improving on other parts of your risk profile straightaway. Your financial history, for example, is something that you create over time by your own choices, every day.

Missing scheduled payments is probably the most common way people do damage to their credit score without realising it

Your credit report is a factor you can start working on right now. Your credit report gives you a score that combines details such as what other debt you have with your repayment history (which tells the bank how well you manage that debt). So, if you want to apply for personal loans in the future and stand a better chance of being approved, at a better interest rate, make sure you maintain a healthy credit score.

Keeping your credit score clean

Missing scheduled payments is probably the most common way people do damage to their credit score without realising it. Remember, this doesn’t apply only to loan repayments – missing any scheduled payment can affect your credit record. So, failed debit orders on monthly accounts such as your DStv subscription or your home security contract are also bad for your score. You can find out more, and how to avoid missing those payments even in a cash crunch, here.

If you have a clean credit record so far, following these tips will help you keep it that way. If you’ve made mistakes in the past that have left you with a poor credit record, don’t panic. You can redeem your credit score by changing your debt behaviour going forward.

So, remember the secret to getting better interest rates on personal loans: paying attention to your credit score, and making financial choices that keep it healthy.