What is credit scoring? 

Credit scoring is a way for companies to assess how high a risk you are when it comes to lending you money. The actual scoring systems and thresholds will vary from company to company and product to product – if one company rejects you, another may still accept you.

There is universal credit rating nor is there a black list. However, if one company believes that you are too high a risk to lend you money, it is likely that many others will also be of the same inclination. Bear in mind that lenders are there to make profit – no lender is obliged to give you credit.

There are a few main ways companies use to determine when looking at your credit score.

The first is your application form. This will give the general picture of what your finances are like – how much you earn, your family size, reason for wanting the loan/credit and whether you are a home owner.

The next is your history with the company itself. For example a bank may look at your bank account history to judge whether you should be allowed a credit card or not.

Then, there are the credit reference agencies. The main two are Experian and Equifax. Most lenders will use at least one when assessing you. These companies hold information about your credit on file and they can send this data to anyone who is about to lend you money. However, the two companies may hold slightly differing information on you. 

So what information do credit reference agencies hold?  The first is the information on the electoral role. This information is freely available to anyone, and it is important that if you move address, you ensure you register on your local electoral roll. They also hold information on court records – companies can see if you have a history of debt problems such as CCJs or bankruptcies. The more of these problems you have, the less likely you are to get credit. Finally, they also hold financial data on you. This data will show how many cards you have, how many defaults there are on the cards and how many other companies have run a search on you recently.

The lenders will assess your application from all three of these factors before making a decision. Remember that just because one lender will not give you the facilities you require that others will make the same decision.

Lenders are in the business to make money. If they do not believe you will make them money, you will be rejected. Although risk is a part of this – if you have a bad credit history you may be rejected because the lender may not believe you have the means to pay back the money – conversely if you have an excellent credit rating you may also be rejected. This is because if you pay your outstanding balances in full each month, the company will make no money from you.

Checking your Credit File

There are billions of pieces of data held by the credit reference agencies. To this end, mistakes may happen. Identity Theft is also on this increase. Because of these reasons, it is important to check your credit file on a regular basis (perhaps once a year) to ensure that it is in good order. Checking your own credit file will not affect your credit rating.

When you receive your file, check the main facts first. Are all your debts listed correctly? Is your repayment history accurate? Check to make sure all your current and previous addresses are correct. If they are incorrect, you may be judged on someone else’s credit history and your finances may be incorrectly linked in with somebody else’s.

If you find an error, write to the credit reference agency and request that the details be changed. Depending on the nature of the error, the reference agency may require you to talk to the company who lent you the money before they will amend the file. If the agency refuses to amend your file, you can ask for a ‘notice of correction’ to be put on the file. This means that anyone searching on your credit history can read this note and this may help you to obtain better credit. If you do have to use a notice of correction, ensure that you state the facts and nothing more. Do not put in too much explanation.

To obtain your credit report, write a letter to each of the credit reference agencies and enclose a cheque or postal order for £2. Their addresses are:

Equifax: Equifax PLC, Credit File Advice Centre, PO Box 1140, Bradford, BD1 5US
Experian: Experian Consumer Help Service, PO Box 8000, Nottingham, NG80 7WF

You can also go to their websites and fill an online form – ensure you are filling in the correct form and not the more expensive ones!

How to Improve your Credit Score

- Ensure you are on the Electoral Roll: If you are not on the roll, it is unlikely you will get any credit. If you are not eligible to vote, send the credit references a proof of residency and ask them to make a note on your credit file to say that have seen this proof.

- Time your applications: Too many credit searches in a short space of time will count against you are it looks like you are desperate for credit and could be a sign you are in a lot of debt which you are unable to handle. Remember that mobile phone contracts, house insurance and car insurance can all leave searches on your file. Try to space these out around the year.

An important note: If you are rejected and you are unsure as to why, check your file immediately. There may be an error on your file. If you continue to apply and you are continually rejected before you fix the error, you are likely to be rejected even after you have fixed the error because of all the searches on your file.

- Stability is good. Lenders prefer people who own their own homes and who are employed (rather than self-employed). Landline numbers are also preferred to mobile numbers as these can help with security checks.

- Cancel unused credit: Cancel any unused credit cards, debts and accounts. This lowers your available credit and makes you look like a more attractive proposition.

- Good Credit History: Always try to keep up with your payments – pay off at least the minimum amounts each month. Even one or two defaults can affect your credit for years to come. If you are having problems managing your debt, contact the lender as they may be able to help by freezing interest, or lowering your minimum amounts. Changing your repayment schedule is far less damaging that defaults of CCJs against you. Remember that credit scoring tries to predict your behaviour. No credit history is a problem as lenders are unable to predict your behaviour. If you are in this situation, you may have to go for a card with extremely high APRs. Use one for 6 months to a year, ensuring that you ALWAYS pay the amounts back in full, and this should build good credit history meaning you will be able to get a much better deal on a new credit card.

- Joint Finances: Marriage will not affect your credit score. However, if you share any bills, your credit scores will become interlinked and this can impact your personal score. If your partner has a poor credit score, keep your finances completely separate to ensure you stay with a good credit rating. If you do have finances which are linked, and you split up with your partner, write to the credit reference agencies and ask for a ‘notice of disassociation’. This means that their credit history will not be able to impact on your in the future.

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