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 more likely to run into financial trouble.
What is a credit check?
It will therefore take a look at your official credit file, which gives details of your financial history. The bank or building society will then be able to find out whether you have a mortgage, how much you owe on credit cards and whether you have missed any payments.
The credit report helps the bank to decide whether or not to approve your application for credit – and on what terms. But lenders each have their own secret rating system and will also consider your application form and any previous dealings with the bank to come up with a credit score.
It all 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 importance of your credit file
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. Someone with a spotless record, for example, is likely to qualify for a 0% 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 or bankruptcy should remain on your file for six years.
What affects your score?
There are various ways to damage your credit rating. For example, if you are late with a credit card payment or miss a monthly payment on a loan it will show up on your credit file and could adversely affect your score. 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.
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 against their name.
But it’s not all about poor debt management. You will more than likely struggle to borrow money in the future if you have never borrowed money in the
past as you will have little or no credit history. And no credit history makes it tricky for the lender to assess your creditworthiness.
You could even end up with a poor credit score if you are the model customer. People who borrow only small amounts or who prudently pay off their credit card bills in full each month are not profitable for lenders, so are often turned down for credit.
Footprints on your file
Try not to apply for credit too often. When you make an application it leaves a footprint on your credit file, visible to other lenders. If you apply for multiple loans or credit cards in quick succession, lenders often assume that you are in some kind of financial crisis. You should therefore limit your applications, particularly if you have already been turned down.
If you want to test the water with different lenders, ask for a quotation search rather than a credit search. You will still get some idea of the likely outcome of your application, but it will not leave a footprint.
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 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 get a good credit rating
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.
The information on your credit report is important because it can affect your ability to borrow money
It’s also a good idea to close any old credit card accounts before you apply for further credit. 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.
Don’t forget to sever any financial links with previous partners. If you live with someone who has a poor credit rating, it should not affect your own score. But 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.
If you have no credit history or you have a poor credit score, you can build up your rating by taking out a credit card aimed at people in your situation. 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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