MAKE SURE YOU GET CREDIT WHERE CREDIT’S DUE
Written by PayPlan on 8 October 2018Here, Experian credit expert James Jones tells us about the importance of your credit score..
A survey for this year’s Credit Awareness Week revealed that more than a quarter of Brits claim they know their current credit score, showing that a significant number of people are now taking the time to get to know their credit report and how lenders use it. But why does it matter? And if you’ve had problems managing credit in the past, what can you do to help make sure your credit history recovers and supports your financial goals? Let me start by explaining what your credit report and your credit score are and why they are important.
Your credit report is your track record at managing a wide variety of agreements such as loans, credit cards, mortgages, mobile phone contracts, bank accounts and even some regular household bills such as energy, water and broadband. Your report, which generally covers the past six years, also includes relevant public records such as the electoral register and official financial records like court judgments (eg CCJs and Scottish decrees) and insolvencies (eg bankruptcies, insolvencies and protected trust deeds).
When you apply to borrow money or set up a new agreement that includes a credit facility, the provider will usually access your credit report to help it decide whether to say ‘yes’. If your application does get the nod, the information on your report can also help determine the terms they offer you, such any borrowing limit and rate of interest. Essentially, the lender will use your report to try to predict how you’ll behave in the future, based on how you’ve repaid credit in the past. The lender might also assess the information on your application form (about your occupation and income, for example) along with any information they already know about you if you’ve been a customer before.
Credit reports are compiled by the UK’s three main ‘credit reference agencies’: Experian, Equifax and Transunion (formerly known as Callcredit). Because lenders voluntarily share customer information with the agencies and some lenders choose to only work with one or two of them, your report at each agency can differ slightly. You can get a one-off ‘statutory’ credit report from each agencies’ websites for free.
Most lenders process large volumes of credit applications so to help them do this quickly and fairly they often use an automated process called credit scoring to do the legwork. Scoring turns the information the lender has about you into a single number called your credit score. This score reflects the risk (probability) that you’ll miss payments in the future. The higher your score, the lower the risk. The higher your score, the higher your chances of getting credit and being given the best deals.
As well as your credit report, you can ask each agency for a guide credit score. Experian’s is called the Experian Credit Score. While this won’t be the same as the score any particular lender calculates (they each have different policies) it should give you a decent idea of how a lender might assess your report. The guide scores provided by different agencies aren’t directly comparable either as they’re calculated using different formulae and different scales, but they should all tell a similar story. You can check your credit scores from the three main agencies for free, either directly or via a third party such as Clearscore.
We calculate the Experian Credit Score on a scale of 0-999. If your score is 961 or higher this is classed as excellent and means you should be able to access cheap borrowing from a wide range of providers. Get a poor score (720 or less) and you might struggle to be accepted for mainstream credit and, if you do find someone prepared to lend to, they’re likely to charge you a higher interest rate. So it can certainly make financial sense to check out and regularly monitor your score and look for ways to improve it.
General credit score tips:
- Build a positive track record. Use some credit, stay within credit limits and never miss a repayment. Setting up Direct Debits can help.
- Don’t max out your credit cards. Ideally, keep balances below 30% of the limit on each account. You don’t want to appear over reliant on borrowing.
- Space out new credit applications. You want to avoid looking needy. If an application is refused, find out why before trying again. Use this Credit Refusal Pathfinder tool for guidance.
- De-link your report from an ex-partner. – Credit reports are not connected by address, so living with someone does link up your credit reports. However, if you previously had joint credit with someone (usually a partner) your reports will have been linked, connecting your credit histories. If this relationship has now ended, you’ll need to contact each of the three main credit reference agencies and ask for a ‘disassociation’. If you don’t do this, their current borrowing could continue to affect your credit applications.
- Register to vote. This can give your credit score a small but helpful boost, and it helps identity checks too.
And if you’re recovering from a period of problem debt:
- Debt management plans (DMPs) are not included on credit reports as standalone entries but can be referenced on existing agreements included in the plan.
- Insolvencies, such as bankruptcies, debt relief orders (DROs) and Individual Voluntary Arrangements (IVAs), are very bad news for credit scores but fall off your credit report six years after they first appear, as long as they’ve finished. Court judgments fall off your credit report after six years, unless paid within a month in which case they removed immediately.
- Up to date: Make sure your credit report is updated to reflect 1) the current balance of any accounts still showing and 2) the status of court or insolvency record. As account balances are cleared, each of your lenders should update the information on your report to show ‘balance settled’ or ‘balance satisfied’ (defaulted accounts are satisfied, non-defaulted accounts settled).
- Defaulted accounts stay on your credit report for six years from the default date regardless of subsequent payment. In the eyes of most lenders, a satisfied default is preferable to an outstanding default. Some lenders have rules about not lending to customers with outstanding or, sometimes, just past defaults at all. The same is often true of court judgments. Helpfully, lenders will usually advertise this upfront.
- The impact of negative information on credit scores often reduces as it gets older. Lenders tend to focus on your more recent track record, underlining the importance of building a new positive profile after a period of problem debt. If you can do this while negative entries are still showing you can avoid the trap of ending up with no credit history at all, which is also bad news for credit scores. Getting a ‘credit builder’ type credit card can be a useful stepping stone.
- In the picture: while past problems remain visible on your credit report, consider explaining any relevant mitigating circumstances (such as losing your job, becoming ill or a relationship ending) using a ‘notice of correction’. You’ll find details of how to do this on the credit reference agency websites. The note is appended to your reports.
- Do your homework: if you’re planning to apply for ‘credit builder’ card (aimed at people with a poor credit score), or any other type of credit for that matter, be sure to use an edibility-checking service (there are several, including on the Experian and Money Saving Expert websites). These will help you apply for deals you’re likely to get and, while you’re shopping around, only register ‘soft’ credit searches on your report, which cannot hurt your score.
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