Credit card Guides

Understanding your credit score

Updated: Wednesday 14 December, 2011

By Martin Fagan

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In a financial climate that’s making it increasingly difficult to obtain credit, it is becoming more useful than ever to know exactly what’s on your credit report.

Over the course of 2011, around one third of applications for credit cards were rejected due to the poor credit ratings of the applicants, according to credit referencing agency, Equifax. Five years ago, Barclays announced that it had rejected around 50% of applications to its Barclaycard, the UK’s most popular credit card.

If you’ve ever been refused credit, knowing what’s on your credit report allows you to correct anything that might be preventing you from getting the credit you need.

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• What is a credit score?
• How are you scored?
• What type of information do these agencies collect?
• When is your credit rating checked?
• How to check your reports
• Important things to remember
• Why check your credit rating?

What is a credit score?

Each time you apply for credit, the lender will check your credit score against what it considers to be the “perfect customer” in order to predict your behaviour as a borrower.

The scoring criteria - what each bank considers a “perfect customer” - is never released and varies not only by lender, but also by product. While this means you might be rejected by one provider and not another, you shouldn’t send out a raft of applications at the same time. This gives an impression of desperation and will adversely affect your chances of being approved.

What your credit score says about you will also affect the rate that you’re offered on a loan, credit card or even a mortgage. Typical annual percentage rates (APRs)are used to compare credit, but this isn’t the rate that’s given to everyone - it’s the rate that two-thirds of borrowers get. Banks will see you as more of a risk if you have a poor credit rating and you’ll probably be offered a less competitive rate than the rate offered to someone with a better credit rating.

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How are you scored?

Banks have three ways that they work out whether or not you’re a viable investment:

1. Application forms: These provide banks with a lot of the personal information they need about you such as your age, address, marital status and salary. Make sure you fill in application forms carefully as mistakes can affect your chances of approval. Things lenders like on application forms include fixed phone line numbers (rather than mobile numbers), long-term employment history, long-term living in one place (ideally owned rather than rented) and long-term record with the same bank
2. Your history with the company: If you have held an in-balance current account with a particular bank for some years, that they can see has regular incomings, they’ll be more likely to approve credit for you. However, the Data Protection Act can limit the amount of information different groups within a company can share with each other.
3. Credit reference agencies: In the UK there are main three agencies - Equifax, Experian (sometimes called CreditExpert) and Callcredit. They all collect information about you and they share it with other banks and lenders.

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What type of information do these agencies collect?

The UK’s three biggest credit reference agencies collect information on a variety of things, but it’s good to know that banks don’t tend to check all three. If you know what each of these agencies say about you, and which banks use which agencies, you can tailor who you apply to.

These agencies will collect the following information about you:

• Whether or not you’re on the electoral roll - you’ll be more likely to be approved credit if you’re registered to vote
• Court records - any county court judgements (CCJs) will go against you when you apply for credit.
• Financial data - Banks share information on how you operate your accounts, providing lists of “black” and “white” data. Black is any late payments, defaults or problems, and white is how you operate your credit accounts.

However, contrary to many people’s belief, there are a number of things that these agencies don’t collect information on:

• Fines
• Savings accounts- They only check-up on accounts with some sort of credit attached to them like an overdraft or a credit card
• Student loans
• Your medical history
• Criminal record
• Child Support Agency (CSA)
• Third-party information
• Any accounts opened before 1994

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When is your credit rating checked?

Companies will run a credit score and check your record with an agency whenever you apply for credit. Credit doesn’t just refer to borrowing money; it also applies to things like mobile phone contracts where you will be trusted to run up a phone bill before having to pay for it.

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How to check your reports

There are two ways in which you can check your files:

1. Online with each agency - You will probably be asked to sign-up to a monthly subscription, but there will usually be a free introductory period where you won’t be charged if you cancel before it expires. Find out more about checking your credit report with Creditchoices.co.uk.
2. By post - You’re legally allowed to write to each agency and ask for your file for a £2 fee.

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Important things to remember

Even if you have a good credit rating, you could end up being rejected for certain credit cards and it can be quite confusing trying to figure out why.

• There is no standard decision-making credit ratings checklist. Each lender has different priorities which affects theirs, so if you are rejected by one company you may not be rejected by another.
• Despite what many believe, there is no “blacklist” of bad borrowers; however, banks use similar information to base their decisions on, so if your credit rating is particularly poor you could feel as if you’ve been blacklisted.
• It is possible to improve your credit rating and improve your chances of being approved for financial products. For more information on improving your credit rating, read the Creditchoices.co.uk guide.
• Surprisingly, you might be rejected for always paying off your credit card in full. Banks are here to make money for shareholders, so if you never pay any interest you won’t be making them any money and you could be rejected even if you have an impeccable credit rating.
• One product is often used as bait for another. This means that when you apply for a savings account, you might be scored on your likelihood of applying for a credit card too.

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Why check your credit rating?

Even if you think you have a good credit rating, it’s always useful to know what is on each of your files. Checking your credit reports allows you to spot any mistakes, cleared or cancelled accounts that haven’t been removed, and keep an eye out for fraudulent activity such as other people applying for credit in your name.

Another good reason to know what’s on each credit report is that banks don’t all use the same agency, so if you know which bank uses which agency, you can adapt your applications accordingly and increase your chances of being approved.

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