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Do you want a cheaper mortgage or credit card? We explain the ways in which you can improve your rating.
The festive period has been and gone, and thoughts now turn to clearing your Christmas credit card debt.
How severe is your financial hangover? If you have a strong credit rating, you might not be feeling too bad. If you have a poor credit score, however, that headache is going to last a lot longer.
“The new year is as good a time as any to start addressing your credit history if you’re one of the millions of people in the UK with a below average credit score,” says Tom Eyre, the founder and chief executive of Credit Improver, a company that aims to help people to boost their rating.
Many people lack understanding about how credit histories can affect the state of their finances. In a recent study by Aqua, the credit card company, 79 per cent of adults had no idea what their credit rating was and more than half — 53 per cent — didn’t know how to improve it.
Mr Eyre says: “From mortgages to utilities, credit cards to phone contracts, so much that used to be taken for granted now relies on credit scoring for access and pricing. Failing to manage your credit report and score can be like throwing money down the drain.”
Here’s what you need to know.
■ What can damage my
The three main credit rating agencies in the UK are Experian, Equifax and Callcredit. They collect information about your payment behaviour from banks, building societies, insurers and other organisations, which can be used to assess your likelihood of repaying a debt. This is then reflected in your credit score.
Missed or late payments will affect how you are viewed by lenders, and stay on your credit record for at least three years; county court judgments for non-payment of debts, individual voluntary arrangements and bankruptcies stay on it for at least six years.
If you have a joint account or any other financial product with someone who has a bad credit record, this could also have an impact on your ability to get credit.
Inconsistent information, such as different addresses or variations of your name, can be detrimental to your score — it’s important to provide the same details on all accounts that have a credit facility, otherwise there’s a chance that they won’t be matched to your report. This would be a waste if you are paying your bills on time, explains Justin Basini, founder and chief executive of ClearScore, a service that gives you access to your Equifax score.
“This might be the case even if on one account you use a middle name, and you don’t on another.”
Shopping around for quotes on comparison sites will not damage your score. This is known as a “soft search” and is not visible to lenders. Mr Basini says: “Only credit application searches, also known as hard searches, leave a mark on your credit report that lenders can see.”
Use eligibility checkers, such as MoneySavingExpert’s eligibility calculator, to gauge your chances of being accepted for a product before you apply.
Only apply for new products when you really need them. Frequent applications for credit can lower your score. However, “your salary, student loans, parking or driving fines, council tax arrears, current or savings account information and any details about gender or ethnicity are not represented in your report, so do not affect your score,” adds Mr Basini.
■ What can I do to improve
James Jones, the head of consumer of affairs at Experian, says: “The key factors are fairly intuitive, such as making required repayments on time and not breaching borrowing limits.
“Less obvious factors are registering to vote [lenders look at the electoral roll to check that the address matches the one you’ve given], keeping your balances low and spacing out any new credit applications [to avoid a look of desperation].”
Don’t fall behind on mobile phone and utilities payments either: mobile phone contracts and many regular household bills such as gas, electricity and water are now registered on credit reports.
The important thing is that you build up a credit score. If you have a thin credit history a simple way to build your score is to keep a credit card active, by spending only small amounts and paying them off each month, because this will demonstrate to lenders that you can manage debt responsibly.
If you struggle to get a standard credit card, you can apply for a credit builder card, but be aware that the interest rates charged on them are much higher, so you should pay off the balance in full every month.
Tenants can set up a future credit rating boost by signing up to CreditLadder, a free service that works with Experian to capture regular rent payments. The scheme launched in March 2016.
“The hope is that we will see the information included in our credit reports this year,” says Mr Jones. In the meantime, those who have already registered are building up their rental payment history, which will boost their credit score when the information “goes live”.
Equifax has said it recognises the benefit of including rent information in reports to reflect good payment behaviour and it is looking into this further, although it does not have such a scheme in the pipeline.
Above all, check your credit file regularly, especially before applying for a mortgage. Experian and Equifax offer free 30-day trials of their credit report service, and Noddle, which is run by Callcredit, grants you free access to your report for life.
■ Who uses your credit report?
It’s up to lenders to decide which credit reference agency they use. They could ask one, two or, in a handful of cases, all three of the main agencies for information about you.
This doesn’t necessarily mean you need to approach all three for your report, although it can certainly be worthwhile to do so. First approach the agency that reflects the lenders you have used in the past. Bear in mind that Experian is the largest in the UK.
Each agency uses information differently to assess you, so you may find that if you had bad credit with a lender who uses one particular agency, your credit score could be higher with a different agency. Confusingly, no one has a “universal” credit rating.
■ There’s a mistake in my credit
report. What should I do?
If something on your credit file is incorrect (such as a wrong address, an old account or a mistaken defaulted payment), or doesn’t apply to you (which could indicate someone fraudulently applying for credit in your name), contact the credit reference agency immediately.
Raising a dispute means that the agency has 28 days, according to the Money Advice Service, to investigate the issue and either remove the information from your report or tell you why it doesn’t agree with you.
If there were mitigating circumstances for something negative on your report, such as a default on a debt because of redundancy or ill health, you can send an explanatory note to be added to your report. This won’t alter your credit score, but it will be observed by lenders.