Credit scoring is an art shrouded in mist. There are many confusions, so I want to try and clear away that fog.
When you apply for credit – which isn’t just loans, mortgages and credit cards, it’s also energy on direct debit, bank accounts, monthly car insurance, contract mobile phones and more – lenders are trying to predict your future behaviour based on your past.
They do this by using three pieces of information, your application form, any past dealings they’ve had with you and the data held on your credit file with one of the three credit reference agencies.
In a way it’s quite intuitive.Imagine you’re in a pub and someone comes in, having lost their wallet/purse and wants to borrow £20. Now let me give you three circumstances.
l Rod has done it many times before and ALWAYS pay it back the next day, plus he buys you a pint to say thanks.
l Jane has done this many times before and often forgets to pay the money back.
l Freddy looks a nice person but you’ve never met him before.
My guess is you’d lend to it to Rod, but not the other two.Credit scoring works the same way – a good history of borrowing makes them think you’ll be a good borrower, a bad history or no history means they err on the side of caution.
The three main credit reference agencies all offer you a credit score – based on different measures. Yet it’s just a loose view of what a typical lender may think. In reality every lender scores you differently based on its own definition of what is a profitable customer. Many people contact me on social media panicking “my credit score has dropped 10 points because I cancelled a credit card”. That’s just one agency’s generalised view on a trivial matter, so don’t get hung up on it. Of course, big things like a default do count.
Others complain to me that “I’ve got a perfect credit score but I’ve been rejected”, yet the agency’s credit score misses the key piece of information lenders have on your application file – your income. Even with a perfect credit score, if your income isn’t enough to comfortably pay, you’ll fail the affordability score and be rejected.
You have a file at each of the three credit reference agencies, which details all your credit transactions, how well you repay and whether you’ve had any debts or county court judgements. These days there are ways to see all three files for free via the web.
You’ve a statutory right to see your current file at the actual agencies themselves, either online or by post – but you will need to apply each time you want to see it, unlike the others which are updated.
When you get the file, check it line by line for errors. I once did a TV money makeover for a woman looking to buy a house, who couldn’t work out why she’d been rejected for a mortgage. It turned out she had an old, technically active but unused mobile still registered to her old home. That was what put the kibosh on her application.
10 ways to boost your credit worthiness….
1. Paying rent on time can boost your credit score. Private renters and social housing tenants can opt in to a free scheme www.experian.co.uk/rental-exchange so rent is now reported on your credit file and can thus boost your score if you pay on time.
2. Perversely, the best way to (re)build your credit worthiness is to get credit and use it properly. Get a special credit (re)build card from www.aquacard.co.uk or www.marbles.com cards, even though it’ll have a hideous 34.9 per cent type APR.
Spend £50-£100 a month on it (never withdraw cash) and ALWAYS REPAY IN FULL each month so you don’t pay the interest. After about six months to a year, you’ll start to (re)build a history and a decent credit score.
3. Spread out applications: Multiple applications – especially in a short space of time – can damage your credit worthiness.
4. Ensure you’re on the electoral roll. If not it can cause ID and tracing issues.
5. Don’t regularly withdraw cash on credit cards. Not only is it expensive but lenders usually see it as evidence of poor money management.
6. Evidence of stability is good. Having a bank account for a decent length of time often helps your score, so don’t change just before a mortgage application.
7. Beware joint products if one of you has a bad history. Holding hands, living together or even marriage doesn’t link your credit files – that happens only when you get a joint mortgage, loan, bank account or even a utility bill. One of a couple’s poor history could impact the other’s.
8. Time applications. Applications stay on your credit files for a year. Bad stuff (such as defaults & CCJs) stay on for six. So if they’ll soon lapse, wait until after they have before applying.
9. Never miss or be late on repayments. Set up a direct debit to be sure it can’t be missed.
10. Be accurate on application forms. Lenders may verify your income and if it’s wrong, you may be auto-declined. Inconsistencies over job title or mobile number can also trigger a fraud fail.
Martin Lewis, founder of consumer help site MoneySavingExpert.com, is here fortnightly to answer your money saving queries.