FinanceTeam

Improving my Credit rating

What is a credit rating?

Various companies will want to know a little bit about you before they decide to do business with you - it's the norm when two companies deal with one another for them to check each other out first, but for the man on the street it may seem a bit odd. Well it's all about balancing risk. Before a bank will lend you any money, they want to work out how likely you are to pay them back. If all their customers always paid their loans back on time, there would be no risk, but they don't! Some people miss a few repayments & some never pay back their loan at all. So the banks do some advance checking and it's semi-automated to speed things up - here's where your credit rating or credit history come into effect. Once the bank for example has seen you rating they can decide with more confidence if and how to do business with you.

Is it important? Why?

Your credit rating is important for various reasons - first of all it may be bad enough to stop you getting a loan at all - or more normally a poor rating will mean that any loan or mortgage you are offered is more expensive, to cover some of the increased risk. So Good credit rating means cheaper loans and mortgages - that's fairly important I'd say!

What is Credit Scoring - how is that different?

Credit Scoring is a more general term - some companies have their own system to rate new or existing customers. They may use a combination of credit reference agency information and the information they hold themselves - perhaps from you application form for example.

How is it worked out?

There is no official credit score as such - although Experian have developed something called the National Credit Score which runs from 0 to 1000 and can be accessed for a fee - Credit reference agencies provide a mix of information about you to the companies that use their service and those companies use that information as they see fit to base their decisions on. So you don't have an official credit score, only a report containing various bits of information.

Who keeps the records and how are they accessed?

There are two main organizations that maintain the credit ratings for the UK population - Equifax and Experian. They keep all this information and provide it - at a cost - to organizations who may wish to see it and also to the individuals themselves who may wish to check their own record.

Can I see my own rating?

Yes of course - legally these companies have to make available to you any personal information they may hold - part of the Data Protection legislation I suppose - but they are allowed to charge a small admin fee for letting you see it - sounds crazy but true.

You can sign up to other services - for example paying a monthly fee to have ongoing access to your record - or even a text alert system that will send a message to you, if anything significant changes on your record - this can be useful for fraud detection.

Another company, CallCredit, offers a one-off online view of your own record for £8.95.

Can anyone see my rating?

No - only certain companies have access to the information and they are carefully screened - they may also be obliged to contribute information back to the system. Also they would be expected to outline exactly why the need to see this information and what they will use it for.

How will a good credit rating help me?

There are two ways of looking at this - the benefit of having a good rating and the downside of having a poor one. Let's take the downside first - having a bad rating can affect your ability to get a loan or a mortgage - a bad rating may stop you getting one full stop - normally the impact is that the interest rate you may be offered on a loan will increase as your rating goes down - the lender of the money is balancing the risk of getting their money back against the amount of money they will make from providing the loan/mortgage.

People with good credit ratings are seen as less risky and therefore the kind of person a bank or lender would like to be lending money to. In a competitive market everybody wants that type of customer, so they will be offered lower rates of interest to attract them - the lowest rate personal loans for example, will only be offered to people with clean ratings.

Is there anything I can do about getting a good rating?

There are some fairly basic things you can do easily and some things that maybe more difficult for you. First off make sure you are on the electoral roll - this is so that companies can verify your address. Next make sure you don't miss any repayments on any mortgage, loans or credit cards. For credit cards just paying the minimum amount will make a difference - you need to be seen as a reliable repayer if companies are going to be happy to lend to you.

Some people who have never had a loan or credit card may not have a great credit rating, because there's no history of how good you are at repaying. Obvious really!

What if they got something wrong?

If there is something on your credit record that is incorrect you can apply to have it corrected. There are different ways of doing this - if for example some information about a loan or account is incorrect, you can contact the bank or lender directly to have it amended or contact the credit reference agency and ask them to do it for you. You can also ask for a note to be added to your record to help explain something - called a Notice of Correction - this will also be sent to any company that may have accessed your record recently.

Is there anything else to worry about?

There are other factors that will influence things like the rate of interest you may be offered on a loan - are you employed or self-employed - self-employed people are seen as higher risk. Do you have printed payslips from your employer? - handwritten or no payslips are viewed with caution. Do you own your own home and if so how long have you lived there - the longer the better. Does anyone else share the home with you? Are they financially linked to you and if so what is their credit rating? Wow it's getting complicated now! - Bottom line is it's all about balancing risk - companies are using all this information to help them decide how risky it is going to be to lend you money or to give you credit on a card. More risk equals less likely to repay and therefore more expensive - you have been warned!

One more thing

Everytime your credit report is accessed it is noted on the record itself - they call it a footprint - so a company looking at your record can see how many other companies have seen it recently. If there have been a high number of searches on your record they may see this as a bad thing. But no searches can also be a worry to them. The fact the your information is accessed shouldn't normally be a surprise to you, as a company should ask for your permission before checking your record, although many don't make this obvious - it may be in their general terms and conditions

Shop around by all means, but keep a close eye on how many credit searches are being carried out - normally a search should only be carried if you have made a proper application, not just an initial enquiry.

Useful websites

www.ico.gov.uk - Information Commissioner's Office

www.equifax.co.uk - Online credit reports and credit reporting

www.experian.co.uk - Leading UK credit reference agency