Credit rating

Credit scoring helps the lender decide whether to lend you money, and for some products (such as credit cards) what your credit limit and interest rate will be.

IMPORTANT FACTS- What is a credit rating?

A credit score is a number or category that reflects how good or bad a credit risk a particular lender thinks you are. Normally, the higher the number, the better the risk you are. Your credit score can determine:

• whether a lender is willing to lend you money
• how much money you can borrow
• what interest rate you will be charged

Your credit score will be based partly on your credit history, which is a record of how much you’ve borrowed in the past and today and how well – or badly – you’ve managed your debts. You need to build one before you attempt to borrow money. This is particularly important if you’ve moved to the UK from another country.

You can build a credit history by opening and managing a bank account, setting up some direct debits and not missing payments.

VIDEO- This gives a good explanation of credit rating.

IMPORTANT FACTS- Who looks at your credit rating?

Your credit rating will be looked at by anyone who is thinking of lending you money. This could be a bank before they give you a loan or a mortgage. Your credit rating might also be checked by other organisations that want to check if you will be trustworthy with money. This could be a landlord wanting to know whether you will pay rent or a phone company who wants to be sure you can cover your monthly contract bills.

Lenders will look at a credit report from one of the three main companies that compile information on how well you manage credit and make your payments. They are:

• Experian
• Equifax
• Callcredit

You can check your own credit report as often as you like and it won't affect your credit score. It's important to check it before borrowing to ensure that there are no mistakes. Statutory credit reports can be bought for £2.

IMPORTANT FACTS- Why have I been refused credit?

• Credit ratings can be adversely affected by high levels of existing debt, missing or making late payments, County Court Judgements, applying for too much credit, unused credit card accounts and not being on an electoral register.
• Any negative marks on your credit report (CCJ's, defaulted accounts) remain on your report for 6 years.
• Sometimes there can be mistakes on reports. Moving house a lot and the having joint finances can also influence credit.

IMPORTANT FACTS- What do you do if you are refused credit?

• Check that there haven't been any mistakes - you should be told whether you were turned down as a result of a search on your credit file and if so, which credit reference agency was used. You can ask for more information about why you were refused but they don’t have to give you a detailed reply. However, mistakes do happen and if you spot an error, fill in a Notice Of Correction with all three agencies. Make sure you include an explanation about why it's wrong, and include any evidence you have. The agency has 28 days to act, and the relevant detail in your credit report will be marked as 'disputed' while it is investigated.

• Don't keep applying for credit - the worst thing you can do is to keep applying for more credit because any credit applications you make – whether or not you’ve been successful – will show up on your credit file. Several applications in a short space of time may make lenders think you are desperate for cash and this will damage your credit rating further.

• Consider alternative borrowing - credit unions can be option if you've been turned down by other lenders. They offer capped interest rates and have no hidden charges or penalties if money is paid back early.

• Get free debt advice- Stepchange Debt Charity and National Debtline can offer free, confidential help and advice.

VIDEO- Clear insight from the Moneysaving Expert on credit rating

IMPORTANT FACTS- How do you improve your credit rating?

• Stop applying for credit until you've sorted out any problems on your credit file and improved your credit score.
• Get on the electoral register. If your name’s not on there you will find it much harder to get credit. You can go onto the About My Vote website, enter your postcode to find for your local council, complete the form and return it to your local electoral registration office.
• Cancel unused credit cards. This also reduces the chances you’ll fall victim to fraud if they were ever to be stolen.
• If you have defaulted on credit agreements in the past (normally meaning you’re three months in arrears), then this will really affect your credit rating. Try negotiating with your lender: offer to pay all or part of the outstanding debt and see if they will remove the default from your credit report.
  • Pay on time- Make your repayments on time and pay off your accounts early if you can. This shows that you are a sensible borrower. If you’re using savings to pay off debts, make sure you keep enough cash in an easy access savings account for emergencies.
  • Use a credit-builder prepaid card- Some prepaid cards have a credit-building option that can improve your credit score. The way this works is you are ‘loaned’ an amount, usually £60, by the prepaid card company. You sign a credit agreement and agree to pay the card company a monthly fee of £5 a month to repay your £60 ‘loan’. At the end of the year, providing you have not missed any fee payments, this will be recorded on your credit report as 12 months of successful repayments.

However, bear in mind that all prepaid cards charge fees. For example, you might pay £5 to get the card in the first place, 2.5% on everything you spend and an extra £1 fee whenever you top up. Shop around to see if you can find one with fewer fees.

• Dissociate from financial links - Whilst these won't affect your score, your financial links may be taken into account when lenders make a decision on your application. Contact each agency and ask to dissociate from any links you are no longer affiliated with.
  • Avoid expensive credit repair companies- You may see adverts from firms that claim to repair your credit rating. Most simply negotiate with any companies that have sought County Court Judgements (or decrees in Scotland) against you. Others claim they can do things that – legally – they can’t, and some may even encourage you to lie to the credit reference agencies. Don’t even consider using such firms. There’s no reason you can’t improve your credit rating yourself so there’s no point paying someone else to do it.