I deliberately mis-titled this article. Credit ratings don't actually exist, it's a myth. Each lender scores you individually based on its own wish-list for a perfect customer. This is a step-by-step guide to understanding how the system works, and checking and improving your score.
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Get a loan, mortgage, credit card, contract mobile phone or even monthly car insurance and lenders score you to predict your likely behaviour. Scoring systems are never published and differ lender to lender and product to product. This means just because one company rejects you, it doesn't automatically mean another will.
Credit scoring doesn't just dictate what products you'll receive. Most personal loan rates are ‘typical', as the actual amount you'll pay vastly varies with your credit score. With credit cards you may get an entirely different product to the one applied for, if your score's too low for the sexy product you wanted.
Clearing up two big myths
- Credit ratings and credit blacklists don't exist. There is no universal credit rating; no one-off judgment of your creditworthiness, nor is there a blacklist. It mightn't feel like that though as, while each lender scores differently, the information is similar, so a bad risk for one lender is often a bad risk for others too.
- Lenders aren't obliged to dole out credit. Applications are aggregated into millions, and banks prefer to deny a few good quality applicants rather than overspend on personalised vetting procedures or accepting large numbers of unprofitable customers.
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This is so important, let me make it as clear as I can.
"Even good risks can be rejected simply because they won't make the bank money!"
Credit scoring is about profit not risk. Of course risk plays a part, as those unlikely to repay are an immediate threat to profits. Yet rejection may happen to even the most solvent if they're unlikely to act in a way that'll make profit for lenders. The sooner we understand banks are there to make money, not help us, the better we can play the system.
Some sophisticated scoring examples that should help:
- Credit card companies reject you for always repaying cards in full. The most profitable credit card customer is perpetually in debt, never defaulting, always paying just the minimum (see Danger Minimum Repayments article). Thus if you pay off in full every month, or always shift debt to 0% cards, you may be rejected for further credit.
- Your score mightn't be for to the product you apply for. It's all about weeding out the customers least suitable for their business e.g. current accounts are often used to draw in new customers to sell them other products. So apply for a current account and you may be scored on how likely it is to flog you a mortgage.
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There are three prime sources of information used for scores.
- The application form. Here lenders obtain the crucial details of your salary, family size, reason for the loan and whether you're a home owner. Ensure you fill the forms in carefully; one slight slip, such as “£2,000” salary rather than “£20,000”, can immediately kibosh any application.
- Past dealings with the company. Companies use any previous dealings with you to help assess your behaviour, though complicated data protection rules can limit which separate units of a company can communicate to each other.
- Credit reference agency files. The three credit reference agencies Equifax, Experian and Callcredit compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. The agency data comes from:
Electoral roll information. This is publicly available and contains address and who lives with whom details.
Court Records. County Court Judgements (CCJs) and Bankruptcies indicate if you have a history of debt problems.
Financial Data. Banks, building societies and other financial organisations compile details of all your payments and transactions. Around 350 million records a month are tracked including ‘black data' which is details of any defaults, late payments or problems and ‘white data' which incorporates how you generally operate the account.
‘Black data’ has always been shared by financial companies but until last year ‘white data’ was only provided by some. Now all share the information, where they have customer consent, meaning that each now has access to all data about you from other organisations.
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There are many myths about what information is held on credit files. Don't be fooled, they hold an enormous amount of financial data, but not everything. The following things are NOT listed on your report:
- Fines. Any fines you have incurred, for example court or driving fines, are not listed.
- Savings Accounts. As savings are not a credit product, they are not included in the report.
- Medical History. Medical problems you may have had in the past are not included.
- Criminal record. No criminal convictions are listed.
- Child Support Agency. Information from the Child Support Agency is excluded.
- Third Party Information. Information is not included about members of your family who live, or have lived, with you, if you don’t share any joint financial commitments.
- Credit Accounts opened before 1994. Although this information is not currently recorded the government are reviewing if it should be in the futrure.
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Student Loans. This information is not currently supplied to credit reference agencies, so whether you have a student loan or not, is not included in your file. The only exception is if you have a County Court Judgement against you for lack of payment, that can be included.
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As we're talking billions of pieces of data, there are always mistakes, and these can act like a hammer on credit applications, smashing everything. It's important to check your files as often as possible, preferably around every 18 months, or whenever you get rejected. And don't worry, even though doing a check is noted on your file, it never impacts your credit score.
Check all three agencies
While in the past just checking one was usually good enough, now I strongly advise you check all three. An error on any one can cause you a problem, and lenders are using a wider spread of agencies.
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There are two ways to get your information, either by post for £2 per agency, or online. Yet online can be costly. The credit reference agencies used to content themselves with selling our data to banks; now they want to make profit from us too, and have all types of clever-sounding products, that they want us to pay for, yet actually aren't that useful. However, it does enable an easy loophole to get all credit reference files for free.
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The Consumer Credit Act 1974 gives you a statutory right to see your credit reference files by simply writing to the agencies, with a £2 fee.
To apply you can complete an online application or download and fill in an application form, either being preferred by the agencies to help make sure they have all the relevant information, but beware they'll often try and flog you more expensive online products.
Alternatively if you prefer you can write a letter detailing your past addresses, enclosing a cheque / postal order, and although there was a time when some of the agencies did not accept letters, they have now confirmed to us that this is ok.
Links and template letters for each agency:
- Equifax. Equifax Online OR Equifax template letter (cheque payable to Equifax Plc).
- Experian. Experian Online OR Experian template letter (cheque payable to Experian Ltd).
- Callcredit. Callcredit Online OR Callcredit template letter (cheque payable to Callcredit Plc).
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The credit agencies' desire to sell us an ongoing ‘credit monitoring' service costing around £70 a year leaves a loophole open. To tempt you, they offer ‘free trials', which involve setting up a Direct Debit or regular credit card payment, in the hope you'll just let it drip from the account.
So sign up, then view your file at no cost (either instantly or after they've sent a passcode) and then cancel the subscription. Even though they allow 30 days, I'd do this straight away; leave it a month and you may forget.
- Equifax. Its Credit Watch Gold* has two options, one at £7.50 a month, but the one to choose is the ‘Free for 30 days and then £69.99 for the year'. When you sign up a payment card will need to be authorised but the £1 fee is not actually charged to your card if you cancel in time. To request cancellation call 0870 0100583 and quote your account reference.
- Experian. Its Credit Expert* offers a ‘free 30 day trial then £6.99 per month' service which includes your credit report. It charges an extra £5.99 to show your credit score. To cancel, call the free-phone number 0800 656 9000, or email customerservice@creditexpert.co.uk
If you're worried about hassle, and just want a simple online report, then use the CheckMyFile*, credit report, which for £19.95 provides some credit details from all three agencies, in one very easy to understand report.
IMPORTANT! All changes/updates are in the free weekly MoneySaving e-mail
Are the additional services worth keeping?
If you're looking just to check your credit reference data, there's no need for all the additional guff. Yet if you're interested in delving deeper, some of the additional services can be partially useful:
- Buy your ‘credit score/rating'. Regardless of how they sell it, this is just a rough estimate of your generalised credit profile; usually based on just one agency's data. It can be useful though in highlighting credit history flaws.
While earlier I said, “there's no such thing as a credit rating”, actually around 30% of lenders do use an agency's ‘rating' as a part of their scoring process. This feeds into their own application form data, past dealings and other info, to build their final credit score.
So there is some merit, but it's quite woolly. Remember every lender scores you differently; the ‘rating' is just one stat and never the be-all and end-all; especially if you've had an existing relationship with the bank. - Credit Monitoring Services. This is a monitoring service providing regular updates of (and I think this should be said with the voice of the Muppets' ‘Pigs in Space') ‘how your credit score is doing'. It's an unnecessary expense for most people.
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Everything! First the obvious stuff. Are all your debts correctly listed? Are there any inaccuracies on your repayment history?
Yet other details are important too. Check your present and past address details. Errors here can lead to you being judged on someone else's credit history. Also your finances may be incorrectly linked with someone else's.
What to do if there's an error?
If you disagree with anything on your file, write to request it's changed. If the agency agrees it should quickly change the file, though sometimes you'll need to talk to the company that originally filed the error.
Unfortunately sometimes it may refuse to amend your file. If this happens you're entitled to add your own comments as a ‘notice of correction'. This will often mean your credit applications take longer, but it may help you to obtain better deals.
Don't go on too much in the explanation though, and don't overly berate. Be concise, explanatory and factual.
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This is a mix of the correct tactics and appropriate behaviour. There's no magic. After all, every lender does it differently, but there are easy ways to up the odds.
- Get on the electoral roll. If you're not on the roll, it's unlikely you'll get any credit. Write to your local council to ensure you are. For those who aren't eligible to vote (mainly foreign nationals), send all the credit reference agencies proof of residency and ask them to add a note to verify this.
- Time applications correctly. Lots of credit searches (the notes left on your file when you apply for things) in a short space of time hurts your score. Space out applications, not just for credit but for car insurance, mobile phones and others, as all can leave searches on your file.
Moving house also disrupts a score, so make important applications pre-moving. Plus you'll score better when you're earning, so if you're about to take time off, go on maternity leave or suspect potential redundancy apply beforehand. - Get a 'quotation search' not a 'credit search'. If you're just trying to get a specific quote for a loan, ask the lender to do a ‘quotation search' and not a ‘credit search'. This means the enquiry won't have a negative impact on your credit score. Sadly many lenders haven't yet adopted this practice, but it is worth asking. If not, do consider whether you really want to get a quote - if it's unlikely you'll get the product, don't bother.
In both the Personal Loan and Credit Card Balance Transfer articles, there are details on special comparisons available to find out who's likely to accept you, without actually applying. - Evidence of stability is good. Home owners rather than renters, and those who are employed rather than self-employed, tend to score more highly. Putting a fixed (land) line rather than a mobile number on application forms can help with security checks and improve your chances. Being with the same employer, bank and current address for a while all help too.
- Avoid the ‘rejection spiral'. You apply. You get falsely rejected due to an error. You apply elsewhere. You get rejected again. This continues, until finally you check your files and get the error corrected. Now when you apply you're rejected again, not due to the error, but because of all the recent searches.
Thus if you're rejected once, immediately check the files are correct, otherwise you may mess up your score for an age. You'll be told by the lender which credit reference agency it used to assess your info, so focus on that.
It is possible after an error to get successive searches wiped, but it involves negotiation both with the agency and the lender and isn't easy. - Cancel unused credit cards, debts and accounts. Access to too much credit, even if it isn't used, can be a problem. If you have a range of unused credit cards, cancel most of them; this lowers your available credit and should help (see the Cancel Old Cards article for full info on what to close when).
- Building a good credit history/repairing past problems. Credit scoring tries to predict your behaviour. As if you've no credit history it's more difficult for lenders to do this, you're more likely to be rejected.
If you can't get credit, sadly the solution is apply for hideous 30%-ish rate credit cards offered by the likes of Monument, the Associates, Barclaycard and Capital One – who offer special ‘high-risk' cards alongside their normal ones.
Use these for 6 months to a year, spending a little every month but strictly repay in full, so there's no interest cost. After that you should've built a credit history allowing you to move into the mainstream. This tactic is also useful for those who've defaulted in the past.
If you've been rejected for cards like this, there is a 'last resort' solution. The Cashplus Creditbuilder* is a prepaid card, meaning you have to load it with cash before spending, rather than having a credit facility. Cunningly it charges a £4.95 monthly fee, which technically counts as a £59.40/year loan. As long as you pay the fee every month for a year, this info will be passed on to credit reference agency Experian.
Crucially though there's no credit check is needed to get the card. Once you've made 12 payments, it should show on your credit history as a fully repaid loan agreement, making you a more attractive customer (to those companies who use Experian for credit scoring, which is the vast majority of them) and hopefully meaning you can apply for better credit card and loan deals. Though you are of course paying £60 for it!
For more details on this, including pros and cons, read Cashplus Creditbuilder discussion. - Keep up payments and never be late. Always try to follow at least the minimum repayment plan for your financial products. Even if you're struggling, don't default or miss payments. Doing this once or twice will cause problems that can cost you for years (though you may be able to get past charges back – see Bank Charges Reclaiming article).
If you are in difficulties, the clichéd 'contact your lender' is good advice. Hopefully it will try and help a little. Changing your repayment schedule is preferable to you defaulting - and though it will hit your credit score, it's better than a County Court Judgment (CCJ) against you. - Marriage doesn't hurt, joint finances does. Simply marrying or living with someone with a bad credit score shouldn't impact your finances, as recent changes means third-party data (i.e. someone else's info) doesn't appear on your file.
Yet if you're 'financially linked' in any product, it can have an impact. Even just a joint bills account will mean you are co-scored. If one partner has a poor history, keep your finances rigidly separate, and it should maintain access to good credit for the other. As a note, there's no such thing as a ‘joint' credit card; technically it's one person's account and the other just has access to it.
If you split up with someone you've joint finances with, once the accounts are separated, always write to the credit reference agencies and ask for a notice of 'disassociation', to stop their credit history affecting yours in the future.
And a final thought. Though it may be tempting, lying on your application form doesn't help. Firstly it's an offence, but also if lenders can't corroborate your information it's normally not used for credit scoring anyway.
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You may've seen adverts for credit repair agencies promising to improve your ‘rating' for a fee, yet there's nothing they can legally do that you can't do yourself for free.
Don't touch the illegal ones!
Avoid any agency offering to repair credit data. Some firms will advise you to perjure yourself and swear you didn't receive a CCJ (County Court Judgment) even when you have. Once it's illegally wiped they try to quickly negotiate a settlement with the lender, before it's re-served. Don't go near!
Don't bother with the legal ones!
Others will, perfectly legally, offer to negotiate with a company you owe money to after a CCJ has been served. If you offer them a settlement (not necessarily even the full amount) you can include as a condition of final settlement that the CCJ should be wiped. Yet don't bother paying anyone for this. The free debt counselling agencies, like the Citizens Advice Bureau and Consumer Credit Counselling Service, will do this for you for free anyway (see Problem Debts: Where to start).
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It's all very well to talk about credit scores and how to borrow, yet I know many people reading this will be struggling to deal with existing debts. Of course in that case, decreasing the cost of your borrowing is one of the steps you need to look at.
Please make sure you read the Problem Debts: Where to start article, which will take you step-by-step through what to do.
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