Credit scoring is a system used by creditors (people who lend money) to decide how much of a risk it is to lend to you. When you apply for credit, you complete an application form which tells the lender lots of things about you. Each fact about you is given points. All the points are added together to give a score. The higher your score, the more credit worthy you are.
Creditors set a threshold level for credit scoring. If your score is below the threshold they may decide not to lend to you or to charge you more if they do agree to lend. Different lenders use different systems for working out your score. They won’t tell you what your score is but if you ask them, they must tell you which credit reference agency they used to get the information about you. You can then check whether the information they used is right. Because creditors have different systems to work out credit scores, even if you’re refused by one creditor, you might not be refused by others. You may be able to improve your credit score by correcting anything that is wrong on your credit reference file.
What information is kept by credit reference agencies?
Credit reference agencies are companies which are allowed to collect and keep information about consumers’ borrowing and financial behaviour. When you apply for credit or a loan, you sign an application form which gives the lender permission to check the information on you credit reference file. Lenders use this information to make decisions about whether or not to lend to you. If a lender refuses you credit after checking your credit reference file they must tell you why credit has been refused and give you the details of the credit reference agency they used.
There are three credit reference agencies
All the credit reference agencies keep information about you and a lender can consult one or more of them when making a decision.
The credit reference agencies keep the following information:
- The Electoral Roll. This shows addresses you’ve been registered to vote at and the dates you were registered there.
- Public records. This includes court judgments, bankruptcies and in England, Wales and Northern Ireland, IVAs, Debt Relief Orders and Administration Orders. In Scotland it includes decrees, sequestration orders, DAS Debt Payment Programmes and Trust Deeds.
- Account Information. This shows how you have managed your existing accounts such as your bank account and other borrowing. It shows lenders whether you have made payments on time.
- Home repossessions. This is information from members of the Council of Mortgage Lenders about homes that been repossessed.
- Financial associations. This shows details of people you are financially connected to. For example, it includes people you’ve applied jointly for credit with or who you have a joint account with.
- Previous searches. This shows details of companies and organisations that have looked at information on your file in the last 12 months.
- Linked addresses. This shows any addresses you have lived at.
- If there has been any fraud against you, for example if someone has used your identity, there may be a marker against your name to protect you. You will be able to see this on your credit file.
How long is information kept by credit reference agencies?
Information about you is usually held on your file for six years. Some information may be held for longer, for example, where a court has ordered that a bankruptcy restrictions order should last more than six years.
How to get a copy of your credit reference file
You can ask for a copy of your credit reference file from any of the credit reference agencies. If you have been refused credit, you can find out from the creditor which credit agency they used to make their decision. Your file shows your personal details such as your name and address, as well as your current credit commitments and payments records.
You have to pay a small fee (approx. £2.00) to get your credit reference file. This is known as your statutory credit report and a credit reference agency must provide it to you if you ask for it. Credit reference agencies may offer other more expensive services where you are sent a copy of your credit reference file on a regular basis. If you are thinking about signing up to this kind of service, make sure you read the details about what it will provide and check it’s what you want before agreeing to it.
What impacts your credit rating?
It’s best to avoid those things that can have a negative impact on your credit rating in the first place. Here are some of the things that may affect it.
- High levels of existing debt. Banks and credit card companies may be nervous about lending you more as this could indicate that you are financially over stretched.
- Missing payments or late payments. On anything from your mortgage, credit card, personal loan, gas or electricity bills. If a payment is missed and then subsequently brought back up to date the missed payment will stay on your file for 6 years from the date it was brought back up to date.
- County court judgement (CCJ) (called a decree in Scotland). If you receive a CCJ for an unpaid bill this will have a serious impact on your credit score. CCJs stay on your file for six years.
- Applying for lots of credit at once. When you apply for credit it will show as a record on your credit report so it’s better to stagger applications. If you do not intend to actually apply for credit and simply want to compare rates, find out whether the lender can register a ‘quotation search’ on your credit report instead of a ‘credit application search’. Lenders know that quotation searches do not represent actual credit applications, so they won’t have a negative impact on your credit rating in the future.
- Having credit cards accounts open that you never use. Lenders will look at how much credit is available to you, not just how much you’re actually using.
- Mistakes on your credit report. Lenders will check your report as part of the credit score process. If there is something on your credit report which is incorrect or that does not apply to you i.e. someone may have fraudulently applied for credit in your name without you knowing – contact the credit reference agency immediately to have this investigated and removed.
- Not being on the electoral register. This is used by lenders to verify that you are who you say you are.
- Moving home a lot. Lenders feel more comfortable if they see evidence that you have resided at one address for some time.
- Being tied into any joint form of credit. Such as bank accounts, loans or mortgages with someone who has a poor credit history, known as ‘financial association’, as this will affect your ability to gain credit.
How to start building your credit history
There are some simple steps you can take to start building a credit history:
- Open and manage a bank account. Setting up and using a UK current account will help build your credit history. If you run it responsibly making sure you have enough money in your account to cover your payments each month it will demonstrate that you can have a responsible, on-going relationship with a bank. Some banks offer new customers/students an interest-free overdraft for the first 12 months, which can be an alternative to apply for a credit card if you only need a small amount of credit for a short period and can pay off your overdraft.
- Make sure you can pay it off in full before the interest-free period ends. Opening and managing a current account responsibly will help your credit rating even if the account doesn’t include an overdraft.
- Set up some Direct Debits. Set up some regular Direct Debit payments to pay bills such as your gas and electricity or your home or mobile phone. Not only will this give you a better credit rating, but you’ll probably get a discount for paying by Direct Debit as well. Always make sure you have enough money in your bank account to pay any bills being paid by Direct Debit or standing order.
- Don’t miss payments. Make sure you pay your bills on time, as a missed or late payment will count against you. If the lender has to go to court to get the money, then a CCJ will severely affect your ability to get credit and it will remain on your file for six years.