A credit score, also known as a credit rating, is a system used by lenders to determine your risk as a borrower. The better your credit score, the more likely it is that you will be approved for a credit product, be it a mortgage, personal loan, hire purchase, mobile phone or any other form of credit product.
Not only can a credit score determine what products you receive, but it can also determine how much you will pay for the credit that you do receive, with the more attractive deals often being reserved for those people who have more favourable credit scores.
What are credit scores?
A credit score, also known as a credit rating or a credit file, is a method used by lenders to determine how much of a risk that you as a borrower could be should they offer a credit product to you. Every time that you make an application for credit, a lender is likely to look at your credit score before deciding whether to approve your application.
The lower your credit score, the higher risk that you are perceived to be and, as a result, the less likely you are to obtain credit from mainstream sources.
A lower credit score may also exclude you from some of the more attractive deals in the market, such as low APR loans or credit cards.
Effectively, when a lender is using a credit file to assess an application, they are asking themselves; “If I lend to this customer, am I likely to get my money back?”
What is kept on a credit “file”?
Your credit file will be compiled by one of three agencies, Experian, Equifax and Callcredit. These credit reference agencies compile data from three key sources to form your credit score:
- Electoral roll information: This provides them with information such as your address and how many people are living there.
- County Courts: This provides the agencies with information of any bankruptcies, CCJs, IVAs or other debt problems.
- Financial Information: This is a compilation of your previous financial activity and will include, amongst other things, any other debts that you may have as well as any previous problems, such as defaults, late payments or unauthorised overdrafts.
There are also a number of elements which, contrary to popular belief, are not included on your credit file:
- Savings accounts or other investments: These are not a credit product and so they will not appear on a credit report.
- Criminal records: Criminal convictions are not listed. Any fines issued by a court (such as a traffic offence penalty) are also omitted from your credit file.
- Child Support Agency: CSA information regarding late/non payment is not included.
- Medical History.
- Student Loans: Student loans are not listed unless you have a CCJ against your name for non-payment.
- Information on relatives: Only your personal financial details are listed on your credit file unless you have held a financial product jointly with your partner or another member of your family.
- Any defaults, late or missed payments from more than six years ago: Your credit file generally has a life span of six years, after which point records beyond this time are likely to be removed.
Who can access my credit file?
Your credit file can be accessed by any company who wishes to offer you a credit based product, although they must have your consent to do this (the consent is usually part of the signed credit agreement). Examples of companies who may access your credit file include:
Can I access my own credit file?
Yes. By law, you have a right to request your credit report at any time from any of the three credit reference agencies. This is known as a Statutory Credit Report. The fee for this is capped at £2 per report (per agency) and must be posted to you within seven working days.
Alternatively, all three of the main credit reference agencies allow you to access your credit report online. Most charge a monthly subscription fee for this for unlimited enquiries, although there are “free trial” periods available.
What if there is an error on my credit file?
If there is an error on your credit file, you should contact the agency concerned to have this corrected although in some cases, you may have to contact the lender that originally filed the data.
Your amendment request may, for whatever reason, be declined by the lender. In this case, you have a right to post a “notice of correction”. This may result in credit applications taking longer than usual, although it may give lenders a more accurate picture of your current file.
Can an IVA or Trust Deed affect my credit rating?
The simple answer is yes; an IVA or Trust Deed will show up on your credit file and can affect your ability to obtain credit.
An IVA will appear on your credit file for six years from date of approval and will be considered as a default. During this time you are likely to be prevented from obtaining credit under the terms of the agreement and even if you are not, obtaining credit is likely to be extremely difficult.
Upon completing the IVA (which will usually last for five years), the record will be removed from your credit file after one year from date of completion.
How do I improve my credit score?
If you believe that you are being affected by a poor credit rating, then there are steps that you can take to improve it over time.
Firstly, ensure that you are on the electoral register. This can be done by contacting your local authority. If you are not eligible to be entered onto the register (for instance, if you are a foreign national), then you can send a “proof of residency” document to the credit reference agencies.
Aside from that, it is possible to “build” (or indeed, rebuild) your credit score using more expensive credit products, such as a high-interest credit card.
Many credit card providers will lend to what they perceive as low credit scoring customers although the rate of interest charged on these cards is much higher than the market average – typically around 30% APR and above. However, by using this type of card sensibly and repaying the balance off in full each month, you will be able to improve your credit score without paying any interest.
Other products, such as certain types of hire purchase and pre-paid credit cards, can also benefit your credit score although there is likely to be some charge, be it through interest of a subscription fee.