In the UK your credit score (also known as credit rating) is based on your financial history and your ability to pay back credit. If you tend to pay your bills on time and keep up repayments on credit cards or car payments, you are likely to have a good credit score. However, if you have problems with late payments or you are in arrears you may find that your credit score is low. This article will give you tips on how to make the most of your credit history and obtain the best credit score you can.
How are Credit Scores Calculated?
No one has an automatic right to obtain credit, and lenders use credit reference companies to help them decide whether to lend you money. Your credit score is based on a positive scoring system, where you start with a rating of zero and build up points over time by being consistent in making credit repayments and managing your finances. The positive scoring system can mean that people on lower incomes who practice good financial management are able to borrow more than their richer (but less prudent) counterparts.
Your credit score is a three-figure number, with higher numbers indicating a better credit score. There are three credit reference companies in the UK: Experian, Equifax and Callcredit. Each company calculates your credit score differently, with their own values to indicate the level of risk associated with lending you money. For Experian a good credit score is 881-960 while with Equifax the range is 400-474. However, a high credit score does not automatically mean that a lender will approve a loan such as a mortgage, as they will take into account other factors, such as whether you are currently employed and what salary you are earning.
What Information Do Credit Reference Companies Hold?
Credit reference companies hold personal information taken from previous credit applications. This includes your name, date of birth and current and recent addresses. The main part of your credit record is your credit history. This lists your credit accounts, the date they were opened, the credit limit or loan amount, and whether you have missed any payments. These account details stay on your report for six years after you settle a loan or close a credit card.
Credit reference companies also record a credit search every time your credit report is looked at, for example if you apply for a mortgage, loan or buy something with interest free credit. These searches stay on your credit record for up to two years. In addition your file records the name of your current account provider, but will not show further details unless they are relevant for the purposes of granting credit – for instance if you are in unauthorised overdraft. Another important thing to note is that public record information such as county court judgments (CCJs), house repossessions and bankruptcies are also included. Such information usually stays on your credit report for six years.
Factors that Negatively Impact Your Credit Score
There are a number of factors that can negatively impact your credit score and the most serious of these is being declared bankrupt. Being declared bankrupt tells lenders that you have not kept up with your current credit commitments and that you are a very poor credit risk. CCJs (County Court Judgements) and Defaults (where you are in arrears with credit payments) are also bad for your credit score and are likely to lead to any credit applications, such as a mortgage, being turned down. In addition, if you have a history of late payments for loans or credit cards or you have a GAIN entry (where you tried to avoid credit payments by moving and not telling your lender your new address) this will be reflected in your credit score.
Another reason for a low credit score is if you have no credit history at all, because you are new to the UK or have just become an adult. In this case, your credit score will be low because you have not built up a financial history over time. To rectify this you will have to build up by your score by making regular, timely payments of utility bills, rent and other commitments to show you are trustworthy. You should also limit the percentage of available credit you use to show you are prudent and live within your means. It is also a good idea to register on the electoral roll at your current address.
If you are turned down for credit it is important that you do not reapply elsewhere until you understand why your application was refused. Ask the lender and obtain a credit report from each of the credit reference companies. Further rejections from other lenders will make your credit score worse and multiple credit applications could be misconstrued as Identity Fraud. Remember that credit searches are noted on your record and multiple searches in a short time period will cause lenders to think you are desperate for money.
Ways to Improve a Poor Credit Score
You should ensure that you check your credit score regularly, perhaps once a year, to avoid any problems when applying for credit. Request a credit report from all three of the credit reference companies. The report will show the information each company holds and will cost £2 each. You can always sign up for a 30-day trial to access your credit record for free, but you will have to remember to cancel the subscription in time to avoid paying fees.
Be aware that others’ dubious financial history could be linked to your credit score via shared addresses or previous businesses. If necessary, you should formally dissociate yourself from former partners or housemates whose financial history negatively affects you. You can do this by contacting credit reference agencies and submitting a dissociation form.
If your credit score isn’t as good as it could be you can explain any legitimate reasons for financial irregularities in a ‘notice of correction’ that can be added to your credit report. This information will give lenders a context for late payments or arrears, such as a divorce or serious illness, and they will often take this into consideration when making a decision whether to lend you money.