Credit Scores

how to improve my balance

By Martin and Amy | Edited by Johanna Updated August 2015

Everyone should take time to manage and boost their credit score. It's no longer just about whether you can get mortgages, credit cards and loans, it can also affect mobile phone contracts, monthly car insurance, bank accounts and more.

The 11 things you need to know about credit ratings

The world of credit ratings is rife with misinformation and misunderstanding - even some national newspapers have got it wrong on occasion. Much of it's because lenders don't want it understood, and credit reference agencies want you to think it works a certain way so they can sell you extra products based on your fear. Here's what you really need to know to debunk the myths.

You DON'T have a universal credit rating

There's no such thing as a blacklist. This is a myth. In the UK, there's no universal credit rating or score, and there's no blacklist of banned people.

Each lender scores you differently and secretly.

This means just because one lender has rejected you, it doesn't automatically mean others will. Though after a rejection, it's always important to check your credit file for errors before applying again.

Of course, if you've got a poor credit history, or had problems, it can feel like you're blacklisted. Credit scoring is intuitive - would you lend to someone with a history of not repaying?

However, on occasion there are firms that specialise in lending to those who have had past problems - though they then charge a whacking rate.

The tools lenders use to decide aren't universal either. As well as your credit file, they also look at application information and any past dealings they've had with you, and use the three sources of information to build up a picture of you.

Credit scoring is about trying to predict your future behaviour

This is not easy if you've little credit history. When you apply for a product, a 'credit check' is done. In practice, this means lenders pour all the data they have on you into a complicated algorithm. It's an attempt to predict your future behaviour based on what you've done in the past.

While a poor history counts against you, so does having little credit history as it makes predictions less certain.

Imagine you are lending someone money. On the surface, they may appear trustworthy. But if you don't have much information about them, then you probably want to know more, just to be sure.

That's why one of the key challenges for some is to build a credit history - it's not easy if no one will give you credit. If you're in that situation, you can find help on how to (re)build your credit history .

It's as much about 'will you make the lender money' as it is about risk

Many people write to us incensed after rejection - "I've a perfect credit score, I've never missed a payment, why on earth did they reject me?"

This is based on a misunderstanding that lenders are credit-scoring to see if you match up to their wishlist of what makes a profitable customer. Of course, someone who is a bad risk is likely to be scored out as unprofitable by most companies. But the risk of not repaying isn't the be-all and end-all.

Credit card companies may reject you for always repaying cards in full.

You might feel like a dream punter, but for credit card companies you're a nightmare. If they spot this trend, you're likely to be rejected. The most profitable customers are those perpetually in debt, never defaulting, but always meeting the minimum repayment .

Pay off in full every month, don't use your cards enough, or always shift debt to 0%

cards, and if they can spot you (it isn't always that easy) some may reject you.

Banks score you based on products they'd like to sell you in the future.

Imagine a bank wants new mortgage customers. That's a costly sell. Instead, it offers a current account paying a high rate of interest on a small amount kept in it. Yet, when you apply, rather than scoring you as a bank account customer, it could actually be scoring to see if you're likely to be a profitable mortgage borrower in the future - you might face rejection if you aren't.

The secretive nature of credit scoring makes this difficult to ever truly know.

What lenders really know about you

It's important to be aware of exactly what lenders know when you apply, so you can present yourself in the best light. Importantly, it's more than just what's on your credit file.

The application form.

In many ways this is the most important. Here, lenders obtain the crucial details of your post code, salary, family size, reason for the loan and whether you're a home owner.

Make sure you fill in the forms carefully. One slight slip, such as a "Ј2,000" salary rather than a "Ј20,000" one, can kibosh any application.

Be consistent too, fraud scoring firms filter applications and if there are many inconsistencies - such as changing your job title each time or different phone numbers, it can cause a problem that you may not be told about.

  • Past dealings you've had with the lender.

    Companies use any data on previous dealings they've had with you to feed into the credit score. This means those with limited credit history may find their own bank more likely to lend to them than others.

    Of course, those who've had problems with a lender in the past may find it more difficult to get accepted there too.

    Equifax, Experian, and Callcredit credit reference agency files.

    The three UK credit reference agencies compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. This data comes from four main sources:

    Electoral roll information

    This is publicly available and contains address and residence details.

    Court records

    County court judgments (CCJs), decrees, IVAs, bankruptcies and other court debt orders indicate if you have a history of debt problems.

    Search, address and linked data

    This includes records of other lenders that have searched your file when you've applied for credit, addresses you're linked to, or other people you have a financial association with.

    The big gas and electricity firms do hard credit checks - these go on your file too.

    Account data

    Banks, building societies, utility companies and other organisations use credit reference agencies to share details of all your account behaviour on credit/store cards, loans, mortgages, bank accounts, energy and mobile phone contracts from the last six years.

    About 350 million records a month are tracked. The first type of information and the most common is 'default data', which shows where you're officially in default.

    Some lenders share 'full data' too. This can incorporate how you generally operate the account, from being the model customer to defaulting. Some, including Barclaycard, Capital One, GE Money and MBNA, share the amount you repay too (if it's the minimum, or if you repay in full) and whether you've a promotional deal (plus if you use credit card cash advances, which you NEVER EVER should). This can mean lenders can better weed out those just playing the system.

    In addition, payday loan data is now normally reported, while doorstep lenders are legally obliged to share the data that they hold on you.

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    Source: www.moneysavingexpert.com

    Category: Forex

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