Your credit score can dictate whether you can receive a variety of different financial products.
Banks and other institutions will check your credit record with a credit reference agency and use this, together with other data, to determine your credit score (also known as your credit rating) before they agree to offer loans, credit cards or overdrafts on current accounts (or anything else based on credit).
Loan providers will also use your credit score when deciding how much interest (APR) you’ll have to pay on a loan. Often, even mobile phone companies will run credit scoring checks before agreeing to a contract. It is surprising how little most people know about their credit rating, considering the impact it will have on their finances. With this in mind, our credit scoring guide is here to tell you how credit scoring works, what determines your credit rating and who keeps a check of your credit score
It is surprising how little most people know about their credit rating, considering the impact it will have on their finances. With this in mind, our credit scoring guide is here to tell you how credit scoring works, what determines your credit rating and who keeps a check of your credit score.
What is credit scoring?
Lenders make their decisions on whether to lend to you by checking your credit record. Banks will first of all check any existing information that they have on you, but will also use credit rating agencies (or credit reference agencies) to assess your credit worthiness. It will also take account of your income, your expenditure, your level of indebtedness and your employment status. If you are applying for a loan from a company where you are a new customer, they will rely on this credit check to decide whether you are an acceptable risk.
This is known as ‘credit scoring’, and its purpose is to assess the likelihood of you defaulting on a loan repayment or credit card debt. There are very strict rules regarding information obtained from credit rating agencies to ensure that your privacy is respected.
Other than in exceptional circumstances (such as suspected fraud or money laundering), information should not be disclosed without your permission. However, by making a loan application you are effectively giving permission for your credit score to be checked.
If you make an application for a loan a search footprint will be entered on your credit record so it is best not to make lots of applications because, even if you do not proceed with the loan(s), this will impede your ability to get a loan in the future. Some lenders will only leave a ‘soft’ footprint which will not affect future applications.
How your credit score is calculated
A lender’s credit rating system allocates points for each item of relevant information, such as whether you are a homeowner (and for how long), your employment status, income and history of handling debt. They then add these up to produce a credit score.
If your credit score reaches a certain level, then the lender may agree to give you credit or a loan. If you do not score highly enough, your application may be rejected.
Lenders generally have their own points system which they may amend on a regular basis.
What does it mean if I am refused a loan or credit card?
Lenders are not obliged to accept an application for credit, even if it comes from someone with a strong credit score- so a refusal does not necessarily mean you have been identified as a bad risk. It may mean that, based on the information available, the lender is not prepared to lend you money at that particular time. It may also be that you do not fit the profile of the potential customers it is trying to attract.
Different banks, building societies and lenders have different criteria and credit scoring systems, so an application to another company may prove successful. A refusal might also be due to a recent change in your address or employment status.
Lending decisions are not allowed to be made on the basis of race, gender, disability or religion.
What are credit rating agencies?
Credit rating agencies hold large amounts of credit information on individuals. They gather this information from a variety of sources such as banks, building societies, credit card issuers, retail stores, hire purchase companies and mobile phone operators.
They also hold information from the electoral register and the law courts, the latter of which will show whether you have any county court judgments or have been declared bankrupt.
Credit search footprints
Each time a search is requested by a lender, it will be noted on your credit file and disclosed to potential lenders in future credit checks. This is known as a credit search footprint.
A lender should always inform you if a credit reference check is being carried out, and you should also be told if information about you is to be stored by credit rating agencies.
If you have had no previous credit problems, a credit check should be very straightforward and, depending upon your other circumstances; you may be eligible for the majority of unsecured loans.
Lenders want to see that you have a track record of handling debt responsibly. If you have never had any credit it can be difficult to borrow. If you’re in this situation it may be worth applying for a ‘credit repair’ credit card, using it sparingly and repaying the entire balance every month, as this will be a good step towards strengthening your credit rating.
Accessing your credit record
Many of the credit rating agencies, such as Experian or Equifax will tell you your credit record if you write to them (or by applying online) for a £2.00 fee. Sometimes through special deals, credit rating agencies will even tell you this information for free, so it’s worth researching.
How can I correct mistakes in my credit record?
Credit rating agencies should inform you as to how you can rectify any information that is incorrect.
If you dispute a piece of information on your credit record, the credit reference agency will flag it as ‘unreliable’ pending further investigation. However, the quickest way to rectify it is to write to the organisation that supplied the incorrect information, asking it to amend it. You can also ask the organisation to correct your data with all three main credit reference agencies.