Whenever you apply for a credit agreement, such as a personal loan, credit card or mortgage, the lender will want to know how reliable you are as a borrow so it can assess whether to lend to you. And it does this by looking at your credit score.
Your credit score is based on a number of different factors, such as whether you’ve missed any debt repayments in the past, your income and even your identity – so, for example, not being listed on the electoral roll can have a big impact on your score.
The higher your credit score, the lower risk you are considered to be, so the more likely you are to be offered credit. However, if you have a very low credit score, any mainstream credit applications will probably be refused, so you will need to take steps to improve your rating.
What information is my credit score based on?
There are five main elements which make up your credit rating.
Information from the electoral roll: This confirms your address and identity.
Court records: So, for example, if you have a county court judgement against you, or if you’ve ever been make bankrupt, this will be logged on your file and is likely to mean lenders will refuse any applications you make for credit.
Other lenders that have searched your file when you’ve made credit applications: This will also include information of anyone else you are financially linked to. For example, if you have a mortgage in joint names with your partner, and they have had financial difficulties in the past, this could have an impact on your own credit rating.
Information about existing credit accounts: This includes any missed payments or defaults, and recent searches that have been made on your file.
Fraud: Whether you have committed any, or ever been a victim.
You should check your report regularly to ensure that there aren’t any mistakes
As well as your credit report, lenders will also look at information shared by other organisations you have borrowed from. For example, if you’ve had a credit card, companies will share whether or not you only repay the minimum each month, or if you clear your balance in full, and whether or not you have missed any monthly repayments.
How can I find out what my credit score is?
It is your right as a consumer to see a copy of your credit report, so you can get a statutory credit report for as little as £2 from any one of the three main credit reference agencies – namely Experian, Callcredit and Equifax
You can also pay more and sign up to an online service which will provide you with real time information about your score. For example, you will receive an email if a search has been carried out or if something has triggered a change on your score. You can compare the different services available from a raft of credit reference agencies and what they cost at the MoneySuperMarket credit monitoring channel.
Can I do anything to get a higher credit score?
Proving you can manage existing debts responsibly – and over time – is one of the best ways to improve your credit score. That means trying to clear what you owe, and making sure you never miss debt repayments. Try not to exceed your agreed overdraft limit either.
You should check your report regularly to ensure that there aren’t any mistakes on it. Even something as simple as getting part of your address wrong can have a serious impact. If there are any errors, then ask the relevant credit reference agency to correct them. Alternatively, you can add your own ‘notice of correction’ to explain what happened and why a mistake has been made – which is free of charge.
If you are making lots of applications for credit, try to spread them out. If you make several in quick succession, this may be a warning sign to lenders that you have financial problems.
Compare credit report providers at MoneySuperMarket.