The Essential Guide To Your Credit Score
ny time you apply for credit – for example a credit card, store card, a bank overdraft, personal loan or mortgage – the information you provide to the lender is used to assess your credit score.
In fact, your credit score is the primary factor in the decision whether to accept or decline your application.
The first thing to realise is that when people talk about their credit score, they often mean the score in reports provided by credit reference agencies like Experian. However all lenders use their own internal credit score, and the information in your credit report only makes up one part of it.
Lenders don’t share every credit application with the credit reference agencies either, so your credit report really is just one part of the overall picture.
Different lenders use different credit scoring systems. The exact mechanics of how they work out your score are kept closely guarded - to prevent applicants from manipulating the system.
It’s no wonder then that the ins and outs of credit scoring remain a mystery to most consumers.
Here we’ll outline a few things you should know about how a lender works out whether or not to give you credit.
First, they will look at any data they already hold about you. This is particularly common with banks and building societies, with whom you may hold multiple products, such as a mortgage, savings and current accounts, credit cards, insurance and pension plans.
The information about each of those account relationships will be held on a central customer file that summarises your overall “worth” as a customer. Including details on any arrears or missed payments.
Second, the lender will credit check you by searching one or more UK credit reference agencies for details of your existing and past credit commitments, and details of any defaulted payments. The types of information held by these agencies has expanded significantly over the years and includes mobile phone contracts, unsecured loans, payday loans, utility bills, overdrafts, mortgages, hire purchase agreements and so on.
Usually the records will go back six years.
The information in your credit report will play an important part in determining your creditworthiness and therefore the lender’s willingness to do business with you.
Third, your application details will be assessed. Always be truthful as lenders will run fraud checks against the information you submit. And bear in mind the application can be a good opportunity to provide an explanation for any one off credit issues you’ve had in the past.
Fourth, lenders will score you based on their own criteria, not the credit agencies. They’ll compare your credit profile against the profile of their ideal customer. Usually that’s the customers they make most profit from. They’ll also consider what types of customers present a greater risk of missing payments and falling into arrears.
The information that counts towards your lender’s credit score isn’t just the obvious, such as your total income or your existing credit commitments. They'll also look at whether you are full-time or part-time employed, self-employed, on a zero hours contract or on benefits.
If you have a job they'll want to know what your job is, who your current employer is and, crucially, how long you have been with them. If you have only worked for your employer for a short time, or if you are on a short-term contract, it may count against you.
Your salary won't be listed on your credit reports, but you are likely to be asked it during your credit application.
Payday Loans On Your Credit Report
Payday loans will show on your report.
How lenders interprete one or more payday or other short-term loans in your file is open to their discretion. If you’ve paid the loans off in full and on time, and only used them once or twice, some lenders will treat this as a positive. Many others will see your need for short term funding as indicative your finances are under strain and score you down accordingly.
Credit Cards And Your Creditworthiness
Taking out high interest cash advances on a credit card however will very likely count against you. Lenders usually view this as a sign you are no longer able to draw from your bank account and/or have poor money management.
On a related note, for a few reasons it can be worth closing down at least some of your unused credit cards by notifying the credit card company in writing.
Apart from being a fraud risk, new card lenders will be concerned you have a lot of unused credit on other cards you could go out and splurge on. Thereby reducing the chances (in their eyes) of being paid back should they approve a new card to you.
As credit card companies reserve their best offers for new customers, closing a card down has the additional benefit of turning yourself into a prospective new customer after a few short months.
Lenders also want to see a consistent repayment history, which you won’t have if your card is unused for years on end.
At the other extreme, credit checks that reveal maxed out cards suggest someone struggling to cope and desperate for more credit. So try not to have all your borrowings concentrated on one card. Aim to utilize no more than 25-30% of each card’s credit limit.
Credit Searches And How They Influence Your Credit Rating With Lenders
Each time you apply for credit (of any kind), searches by the lender will be recorded on your credit reports.
Whether the application was accepted or declined isn’t recorded. But a prospective lender will often infer declines if it sees two or more searches close together and no new credit cards or loans on your report. Which is why making multiple card or loan applications together or one after the other can be really hurt your credit rating.
The golden rule to remember is, only apply for for one credit card or loan at a time. If you get rejected, don’t apply to another company straight away as two rejections and credit searches in quick succession will make it very difficult with future applications. Instead, check your credit score in case it’s low. If it is, improving your creditworthiness should be your priority before making any further applications.
If you know you have a low score, applying for a poor credit card and paying it off in full each month can help improve your score. Money Saving Expert’s eligibility tool is a useful way to see if you’ll qualify for one of these cards without leaving a credit search visible on your file.
Your residential status and history will also be taken into account. Homeowners are generally preferred over tenants. And tenants of furnished properties may even be scored lower than tenants of unfurnished properties.
How long you have been in your current home will also be factored in. A customer with a more stable residential history will be scored higher than one who has lived at five different addresses in the past three years.
Getting credit if you Pay Rent
Since 2012 rental payments have begun to appear on credit reference agency reports. Having a consistent record of paying your rent on time will help but obviously the opposite holds true as well.
If you’ve ever lived in a shared property with a Joint Tenancy Agreement, there’s two very important additional factors to consider...
First, if the rent was ever paid late, this may appear on your file, even if you weren’t personally to blame. Second, the credit history of your co-tenants (for any credit payment, not just rent) can have a negative impact upon your credit score.
This is a highly controversial aspect of credit scoring but regardless of how fair it is, it’s important you contact the credit agency and ask them to remove any references to your co-tenants history. Failing that, request a notice of correction so you can at least provide an explanatory note about the circumstances.
Whilst it won’t remove the entry on your file, your comments will appear alongside it and help reassure prospective lenders.
On a related note, make sure you are on the Electoral Register. This is a common cause of low credit scores , yet one of the easiest to fix.
Get copies of Your Credit Reports
As you can see, credit scoring considers many different factors, some of them not so obvious to the outsider. There’s no one standard credit scoring process, and each lender will have their own view of a customer’s creditworthiness. That’s why a customer accepted for a credit card by one bank may well be turned down by another.
We recommend you get hold of atleast one up to date credit report. Copies of your credit records are available to download (for a statutory fee of £2) by requesting them directly from the credit reference agencies.
The major ones are www.experian.co.uk, www.equifax.co.uk, www.callcredit.co.uk. If you want to save time, you can the view the latter two simultaneously by downloading a combined report with www.checkmyfile.com.
Each has their own scoring system. Experian scores up to 999, Equifax up to 600 and Call Credit up to 5.
Your credit report contains details about any existing or past credit commitments – usually covering the past six years – including records of any payment arrears and defaults. It also contains information that helps identify you to credit companies, such as your date of birth and current and previous addresses.
It will also record any individuals with whom you hold a financial association (for example, if a husband and wife hold a joint current account or mortgage).
You should check each report for accuracy. Credit reference agencies rely on information provided to them by other companies, and it’s not unknown for inaccuracies to exist. For example, address discrepancies and incorrect records of arrears.
So it can be to your advantage to obtain a copy of your report from each of the three agencies.
If you discover an error on your credit file, you can either contact the company that the record relates to (for example, if your bank reported a missed payment or exceeded overdraft that you dispute) or alternatively contact the credit reference agency directly to arrange for a “notice of correction” to be added.
Get a free no-obligation quote
If you are looking for a mortgage but have concerns about having a low credit score, simply complete our 60 second application form to receive expert advice and a free no-obligation mortgage quote.
They’ll be happy to talk through your requirements, and may be able to help you find a mortgage
even if you’ve been turned down by a high-street bank or building society.