Don’t lose the plot over credit scores

Patrick McGoohan starred in the TV cult classic The Prisoner, set in a mysterious fantasy world where numbers were perceived as a denial of personal freedom; in the real world of loans and borrowing, however, they have a useful place

‘I am not a number’, protested Patrick McGoohan’s character in cult 1960s TV series The Prisoner. I hate to break it to you, Patrick, but in the world of credit scoring we are all numbers. The good news is that this is a far less sinister world than “The Village” in which McGoohan’s hero was deposited, and these numbers aren’t a denial of our identity or freedom. In theory, they’re a force for good – intended to help us make more informed decisions when it comes to borrowing. The problem is that, like the plot of The Prisoner, they’re often seen as an enigma.

Credit scores are generated by organisations known as credit reference agencies (CRAs), and are essentially barometers of your financial health, designed to give you a better idea of how you might be seen in the eyes of lenders. A higher score means a higher chance (but no guarantee) that you’ll be successful when making applications for credit products such as loans or mortgages.

To arrive at this score, CRAs analyse the wealth of information they hold about you. This includes your history of repayments on credit accounts and how much you’ve borrowed, as well as information from public records, such as whether you’re on the electoral roll, or have any county court judgements against your name.

It’s strange to think that a company you might never even have heard of – let alone dealt with – is continually cataloguing, analysing and distributing your data. But CRAs play a valuable – if misunderstood – role in the lending landscape. One common misconception is that the decision about who to lend to and at what rate lies in their hands; in fact they’re more of a middle man.

Their existence enables lenders to guard against fraud by using the information they hold to verify the identity of prospective customers, and to carry out thorough risk and affordability assessments. But the Financial Conduct Authority has raised concerns about the quality of this information. As part of the market review that it’s about to kick-off, it plans to look at the depth and accuracy of the information held, and the extent to which this is up to date.

The frustrating reality is that your chances of borrowing could be scuppered by nothing more than dodgy record-keeping. CRAs themselves do have a responsibility for keeping your report up-to-date and error-free, but much of the data they monitor is handed to them by the companies you hold accounts with.

You can ask a CRA and the relevant lender to make corrections, but how will you know these are necessary if you don’t check the information in the first place? The risk of mistakes alone makes it sensible to check your report on a fairly regular basis – especially if you’re about to apply to borrow money. But those who do so are in the minority – Which? research has previously found that more than half of people have never checked their credit report, with a quarter of those saying they were unsure how to.

This lack of consumer engagement and understanding will be another area of focus in the FCA’s study – it believes that this could lead to people “missing opportunities to improve their credit rating and reduce the cost of future borrowing.”

Checking your credit report is now free – and, contrary to a common misconception, doing so won’t have any impact on your credit score. There are three main CRAs in the UK: Experian, Equifax and TransUnion. It’s a good idea to check your report from all three as they won’t be identical. Each one offers a paid-for subscription, which includes extra features on top of access to your report and score – such as alerts when information on your report changes – but the free, no-frills option is all you really need to get a better understanding of how you might be viewed by lenders.

To access your Experian credit report and score for free, you can sign up to the Money Saving Expert Credit Club. To see the information Equifax holds about you, go to Clearscore.com; for TransUnion, it’s Creditkarma.co.uk.

Once you’ve familiarised yourself with the information included in your credit report, and checked that it’s all in order, it’s time to think about opportunities to crank up your creditworthiness. It’s not simply a question of diligently managing existing loans and making repayments on time, although this of course makes a big difference – as does being on the electoral register. According to Experian, one of the biggest boosts to your credit score is keeping your credit card balance within 30 per cent of your overall credit limit, while having a limit of under £250 will have a negative impact.

If you do get rejected, resist the temptation to make another application straight away – several in a short space of time can ring alarm bells with lenders. Not opening an account for six months, on the other hand, can push up your score with Experian.

There’s much more work to be done on the industry’s side to demystify the world of credit scoring – for example, if lenders don’t even explain why they’ve turned you down, how can you be expected to know how to improve your chances in the future? But you’re not powerless in all this – it’s in your interest to pay attention to your credit score. This is a number you really shouldn’t feel imprisoned by.

Jenny Ross is Which? Money editor and co-host of the Which? Money Podcast

Don’t lose the plot over credit scores – Jenny Ross