Credit Ratings - How To Use Them To Your Advantage

To many people credit ratings are a bit of a mystery and whether you get accepted for a loan or not can seem like a lottery. Part of the reason is that the credit culture we’re used to today hasn’t actually been around that long. So the unknown nature of it all has helped perpetuate a number of credit report myths and misunderstandings.

How banks decide who to lend to

A bank will basically use three different types of information when deciding whether to give you a loan, credit card or mortgage. Firstly, it will look at the information on your application form. As well as items such as your age, income and marital status, it will look at how often you’ve moved jobs or home. This will give it an idea of how ‘stable’ you are financially.

Secondly, it will look at how you’ve acted when it’s dealt with you in the past, so how you’ve operated your current account and whether you’ve repaid loans on time. Obviously, if you’ve never dealt with the company before this stage will be skipped.

The last of the three steps is to look at your credit report. There are three agencies in the UK who keep this sort of information. They are Experian, Equifax and Callcredit. Your credit report contains various bits of information about your credit history with other lenders, which we look at in more detail below.

Having looked at each of these three sources of information, a lender will then assess how you measure up on various points and build up its own credit score for you. If your credit score is greater than a certain number, your application will usually be approved. If it’s not, then you’ll either be rejected or offer a smaller loan or one at a higher rate of interest.

Unfortunately, lenders don’t disclose how they score individuals. Each company will assign a different rating to various issues, depending on their experience with customers in the past, so this is why you might be rejected for credit by one lender but accepted by another. Although it’s a popular misconception, there is no such thing as a ‘credit blacklist’.

What’s on your credit report?

Credit reports contain many different types of information about you. For example they contain matters of public record such as whether you are on the Electoral Roll (a prerequisite for approval by most lenders).

Your credit report will also show whether you’ve had any County Court Judgments (CCJ) against you or whether you’ve been made bankrupt, are in an Individual Voluntary Arrangement (IVA) or a debt management programme. Usually these items are shown for the last six years only but it can be longer if you’ve been issued with a bankruptcy restriction order if the court believed you acted dishonestly or were to blame for your bankruptcy.

Any recent applications for credit you’ve made are also shown on your credit report. Usually this information is kept for twelve months but Callcredit keeps it for two years. Whether the application was accepted or not and the amount is not recorded but obviously a lender will able to see if you then went on to have a loan with the company concerned.

Several applications for credit in quick succession can affect your chances of getting further credit as a lender may assume you have been refused or are in danger of taking on too much debt. One way around this problem is to ask for quote for credit rather than making a formal application. This won’t appear on your credit report and you’ll need to make a formal application if you do then proceed to take out a loan. You can also ask for a quotation search rather than an application search to be made.

This will appear on your credit report but any lender will be able to see it wasn’t a formal application.
If you have any financial associations with another person a note of this will appear on your credit report. In this instance, a financial association means having, for example, a joint loan, bank account, credit card or mortgage. A financial association allows a lender to access the other person’s credit report when assessing whether you’re suitable to lend to.

Just because you’re married to or living with someone, their credit history won’t automatically be associated with yours. Additionally, any credit problems previous residents or tenants of your property have had won’t affect your ability to get credit.

Finally, any debt agreements you have or that have been settled within in the last six years will also be recorded on your credit report, together with a summary of your recent payment record where applicable. If you are in arrears or in default then this will be shown. Not all lenders supply information to all the credit report companies so it may be that not all your debts will appear. Some lenders only supply negative information so a record might only appear if you’ve been in arrears or default.

As well as debt agreements, mobile and pay TV payment information may appear on your credit report. Information relating to the payment on utility bills or council tax does not however. Rather perversely, a lack of credit in the past can mean it’s more difficult to get accepted for a loan. Lenders prefer to see a clean credit history rather than none at all.

Getting hold of your credit report

You can write to any of the three credit report agencies and get your credit report for £2. You’ll need to provide your full name, date of birth, and any addresses you’ve lived at in the last six years. This process normally takes a week or so.

As well as using snail mail, you can access your credit report instantly online. This is usually more expensive and there are even more pricey monthly subscription options which allow you to view your report at any time and which also provide you with alerts whenever someone accesses your credit report.

It’s worth looking at your credit report every few years and they do tend to contain a lot of mistakes. For example, a loan may not be recorded as settled or you may still be listed as a bankrupt even though you’ve been discharged. If you contact the lender or court concerned then you can usually get the information corrected. If they disagree then you’re entitled to attach a Notice of Correction to your credit report. This can be up to 200 words long. It may not help sway any new lender but at least they will see your side of the story!

Finally, a word of warning about companies who claim they can repair your credit report. Basically, they cannot do anything you can do yourself for free. And they most certainly can’t remove items like CCJs!