When you apply to borrow money, the lender will assess your creditworthiness. It wants to know whether you can manage your debts, or whether you are likely to run into financial trouble. The higher your credit score, the better your chances of being approved for the most attractive credit card deals.
What is a credit check?
When a lender decides whether to approve your application for credit, it looks at your official credit file, which contains details of your financial history. It will tell bank or building society concerned whether you have a mortgage, how much you owe on credit cards and whether you have missed any payments.
The importance of your credit file
Your credit report helps the lender to decide whether or not to approve your application for credit, and on what terms. But each lender has its own specific rating system and will also consider your application form and any previous dealings it has had with you to come up with a credit score.
It sounds a bit sinister, but contrary to popular belief, you don’t have a single credit score and there is no credit blacklist. In other words, if you are turned down by one lender you could be accepted by another.
The information on your credit report is important because it can affect your ability to borrow money, perhaps if you need a credit card or want to take out a mortgage to buy a house. It will also impact the terms of any credit offer.
The information on your credit report is important because it can affect your ability to borrow money, perhaps if you need a credit card or want to take out a mortgage to buy a house.
Someone with a spotless record, for example, is likely to qualify for a 0% interest credit card deal. But if your record is blemished, you will either be turned down or charged a higher rate of interest.
Check your credit file
It is essential that the details held on your file are accurate. You should therefore check your credit file once a year by requesting a copy from all three credit reference agencies - CallCredit, Equifax and Experian - as there are likely to be three slightly different versions of your credit report.
The Consumer Credit Act gives you the right to obtain your full statutory credit report at any time at a cost of £2 per report, so the total outlay should be no more than £6.
If you spot a mistake on your file, you should contact the relevant agency and ask for a correction, explaining why it is wrong and supplying any appropriate supporting evidence.
Note that information does not stay on your report forever. For example, a missed payment on your credit card will usually be wiped off after three years. Details of a County Court Judgment (CCJ) or bankruptcy should remain on your file for six years.
What affects your credit score?
Your credit score is calculated taking a number of factors into account, including:
• Late and minimum payments: If you are late with or miss a credit card payment or a loan repayment, it will show up on your credit file. You could also find that your record is tainted if you make only the minimum payments on your credit card every month as it suggests that you are struggling to manage your debts.
• CCJ, IVA or bankruptcy proceedings: You will almost certainly end up with a low credit score if you are declared bankrupt or enter into an Individual Voluntary Arrangement (IVA). Lenders are also wary of borrowers who have a County Court Judgment (CCJ) against their name.
• Little or no financial history: It’s not all about poor debt management. You will more than likely struggle to borrow money if you have never borrowed before as you will have little or no credit history. And no credit history makes it tricky for the lender to assess your creditworthiness.
• Access to available credit: People who borrow relatively small amounts or who prudently pay off their credit card bills in full each month are not profitable for lenders, so can be turned down for credit. Similarly, having access to large amounts of credit could worsen your score, as there is a possibility you might draw down a lot in a short space and struggle to service the debt.
• Frequency of credit applications: If you apply for multiple loans or credit cards or apply repeatedly in quick succession, lenders might assume you are in some kind of financial crisis. You should therefore limit your applications, particularly if you have recently been turned down.
It can be frustrating if you are refused credit, particularly as the lender does not legally have to give you a reason. However, you should always ask as they might give you a broad hint. Then check that the information on your credit file is accurate.
You should also make sure that your name is on the electoral roll, as it’s one of the first checks made by lenders.
The timing of your application could affect your score. So don’t be surprised if you are refused credit shortly after moving home or switching jobs. Lenders look for stability and could be put off by any recent changes.
How to improve your credit rating
With no such thing as a credit blacklist or one universal credit scoring system, there are various opportunities for you to improve your score. Here are our top tips:
1. Register on the electoral roll: The significant factor in boosting your score is getting on the electoral roll. If you’re not on it then it’s unlikely you’ll get any credit. It’s free and easy to register on the About My Vote website.
2. Demonstrate financial stability: It goes without saying that the best way to improve your credit rating is to manage your debts well. Don’t miss any monthly payments, stick to the payment deadline and stay within your credit limit.
3. Check your credit report annually: Review your report to check all the information held about you is credit, and correct any errors if you spot them.
4. Close down old accounts: You might owe nothing on the cards, but the lender will look at all your available credit before it makes a decision on your application.
5. Cut financial links with previous partners: if you have any joint financial products, such as a joint current account, they could influence the lender’s decision. You can ask all three credit reference agencies to add a ‘notice of disassociation’ to your file if you have cut financial ties with an ex.
6. Consider a credit builder card: You can then prove to a lender that you can manage your debts sensibly and so improve your score. Just remember that the interest rates on credit cards for people with low credit scores are usually high. So you should only consider this option if you are confident that you can keep your borrowing under control.
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