Understanding your credit score

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. Barclays recently announced that it is rejecting around 50 per cent of applications to its Barclaycard - the UK’s most popular credit card - as well as reductions to the credit limit of around 500,000 Barclaycard customers.

Knowing what’s on your credit report allows you to work to correct anything that might be preventing you from getting the credit you need.

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 to be a “perfect customer” - is never released and varies not only by lender, but also by product. While this means that 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 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.

How are you scored?

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

• 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.
• 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.
• Credit reference agencies. In the UK there are three agencies; Equifax, Experian and Callcredit (see useful links). They all collect information about you and they share it with other banks and lenders.

What type of information do these agencies collect?

The UK’s three 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 judgments will go against you when you apply for credit.
• Financial data. Banks share information on how you operate your accounts, providing list 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.
• The Child Support Agency.
• Third party information.
• Any accounts opened before 1994.

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 pay the bill after making your calls.

How to check your reports

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

• 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.
• If you want everything on one simple report, you can use the CheckMyFile credit report. For £16.95 you get details from all three agencies in one very easy to understand report.
• By post. You’re legally allowed to write to each agency and ask for your file for a £2 fee.

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 credit ratings checklist. Each lender has different priorities which affects their decision making so if you are rejected by one company you may not be rejected by another.
• 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. Click here to find out how to Repair your Credit Rating.
• 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.

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 apply 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.