Credit ratings

14 things to know about credit ratings

The following tips have been inspired by the fantastic www.moneysavingexpert.com

1. You don’t have a universal credit rating; there’s no blacklist.

Each lender scores you differently and secretly to see if you meet its requirements as a profitable customer (this is known in the banking profession as a “balanced scorecard approach”). Those whose history shows they’re unlikely to repay at all are unlikely to be profitable, but good risks can be rejected too, if the lender thinks you won’t make it money. See this Wikipedia article for more information.

A few years ago the three major UK credit reference agencies (Experian, Equifax and Transunion, in order of size) realised that they could sell consumers a “credit score” service. Don’t be swayed by the expensive ad campaigns – these have little bearing on credit applications and are generally a waste of time. Better indications are “soft search” applications (Money Saving Expert and Money Supermarket offer these on loans and credit cards) where you put in some details about yourself and a non-impacting search is made against your credit information, and shows you a */10 chance of getting certain cards. See point 8 for more information.

2. Improving your credit is about looking better to lenders.

There are lots of things you can try to do to make yourself more attractive to lenders, but there’s no universal fix. Different lenders have different criteria, but there are lots of common themes, such as:

  • Evidence of stability is good. Put a landline, not mobile, on applications, or at least maintain the same mobile number throughout.
  • NEVER withdraw cash on credit cards. It’s expensive and is evidence of poor money management. This is considered a “red flag” by many lenders. One exception to this rule would be overseas cash withdrawals from a card specifically used for this reason, and immediately repaid in full.
  • Never miss repayments. Set up a direct debit to be sure that at least the necessary minimum repayments are taken automatically.
  • Check for address errors. An old technically active but unused mobile phone contract registered to your old address could potentially cause a mortgage rejection due to “fraud prevention” systems.

3. You can build credit-worthiness by borrowing money (temporarily and repaying in full, avoiding interest payments!).

Credit scoring is all about trying to predict your future behaviour based on your past. So rejection is likely if your credit history makes you look a high risk borrower due to defaults, missed payments, or other problems. Similarly, a lack of credit history can be a problem, as lenders may struggle to evaluate the risk in lending to you. After all, would you lend to someone you knew nothing about?

The typical solution to bad or non-existent credit history is to get a credit card, do a small amount of your normal spending on it each month, being sure to stick within the credit limit, and to repay IN FULL each month so that there’s no interest due. To do this, you should set up a direct debit to pay off the full amount automatically each month, to ensure you don’t miss a payment. After some time doing this, you will typically start to develop or improve your credit history, as this “good behaviour” feeds back to the credit reference agencies.

There are specific “credit-builder” cards available for those with limited or poor credit histoy, but be warned – these tend to have extremely high interest rates, in the 40%+ per annum range, so it is incredibly important to repay any borrowing in full each month, before you are charged interest. Another possibility, if you’re struggling to find a lender who will offer you a credit card is to check with your existing bank. Sometimes a bank who you have had a senisbly managed account with for a while will be more willing to offer you a credit card as they can take into account the behaviour they can “see” from your current account. If you’re a student, then you may well find that your bank offers a student credit card, which can be a good way of building some credit history.

4. Check your credit file regularly (and possibly get paid to do so).

Even small errors on your files at the three credit reference agencies – Experian, Equifax, and TransUnion (formerly Callcredit) – can cause problems with applications. Check them all line by line at least once a year, plus before any big application, focusing on the one that the lender you’re applying to uses.

You’ve a legal right to check them for £2, but there’s a loophole which means right now you can get paid to check your credit files (you can do this by using cashback sites such as Quidco and Topcashback to sign up for free trials, ensuring that you cancel these before the trial ends).

Statutory reports:

  • https://www.callcreditstatreport.co.uk/ (TransUnion)
  • http://www.equifax.co.uk/Products/credit/statutory-report.html (Equifax)
  • http://www.experian.co.uk/consumer/statutory-report.html (Experian)

Free “Credit Checking Services”

All three CRAs now offer free credit checking services. Please consider the phrase “if the product is free, you are the product”, and be aware that they may use your data to market to you, or sell to third parties. Check the privacy terms carefully!

Disregard any “score” they offer, or associated services!

You do not need to pay for any of the credit reference agencies’ expensive credit scoring products. The methods above will give you free (or at worst £2) access to your credit file, which is all you need. People sometimes worry that “my Equifax credit score has dropped”. These scores, which are sold to you by Experian and Equifax for up to £14.99/mth (and give you a score of up to 999), are just a loose indication of your risk profile, as each lender scores differently and uses far more info than just your credit file.

5. Get on the electoral roll.

If you’re not on the electoral roll, getting credit can be tough, as it causes ID and tracing issues, making it harder to verify your address. Don’t worry about getting lots of junk mail though – you can opt out of the ‘open register’ element, which stops this but still means you count for credit scoring purposes. You register online using the gov.uk register to vote service.

6. You need to know what they know about you.

Lenders assess you with three key pieces of info:

  • Your application form tells them your salary and more.
  • Any past dealings you’ve had with them. So a lender you’ve banked with has more info on you – sometimes good, sometimes not.
  • Your credit reference files, which include electoral roll info, credit products you have, court judgements & more. Check regularly for errors (see point 4).

There is some evidence that credit agencies collect other information about you, but lenders are generally only privy to the above three areas.

7. Avoid lots of applications in a short space of time.

Almost every card or loan application leaves a footprint on your credit file. Too many of these, especially in a short space of time, can hurt future applications. This means the system is somewhat anti-shopping around, as if you get rejected or are offered a worse rate than advertised by a particular provider, you may have wanted to apply elsewhere.

So space out and prioritise applications. E.g., if you’re about to apply for a mortgage, don’t apply for minor things like cashback credit cards in the weeks beforehand. As pointed out in point 8, there are other ways to check eligibility other than simply applying blind to lenders.

8. Find out for free what cards and loans you’ll be accepted for.

Money Saving Expert and MoneySupermarket both offer soft search systems (you see it on your file, but lenders don’t, so there’s no impact) which show an estimate of your chance of acceptance for different cards, so you can home in on the right card, minimising applications.

9. Ensure you time it right.

Major problems like CCJs, defaults or bankruptcy stay on your file for 6 years. Applications for products stay on for 1 year. So if they’ll soon lapse, it can be better to wait before applying.

10. Get unfair defaults removed from your file.

If there’s a default on your file that isn’t fair (e.g., you didn’t pay off a catalogue loan as it failed to deliver the goods), it’s important to get it removed. Try to approach the lender that registered the information first, and if that fails all three credit agencies have “resolution” procedures.

11. Beware payday loans, they can kill mortgage applications.

They’re dangerous in their own right, but some mortgage underwriters simply won’t lend to anyone who’s had one.

12. See if you’re due £100s back from Experian’s CreditExpert.

If you pay or have paid for Experian’s £15/mth credit monitoring service, it may have been missold. There is a guide at MSE all about this.

13. Beware joint mortgages, loans and bank accounts.

It’s not whether you kiss, live together, hold hands or are married that links credit files. It’s simply whether you have a joint credit agreement (mortgages, loans, bank accounts and sometimes utility bills – joint credit cards don’t exist).

If you are financially linked to someone else, then their credit history can be looked at when assessing whether to lend to you. If theirs is bad, avoid any joint products.

14. Be consistent, even on different applications, to avoid fraud scoring.

Fraud scoring is credit scoring’s secret cousin. Among other things, these specialist agencies map how consistent your applications are, even to totally different firms. So be consistent if you’ve a couple of mobiles or job titles – use exactly the same one every time you apply.