Credit Rating

http://www.moneysavingexpert.com/loans/credit-rating-credit-score

Universal credit ratings are a myth, they don't exist in the UK. Each lender scores you based on its ‘perfect customer’ wish list. Yet so many people are under this misapprehension, and look for info on it, we've had to deliberately mis-title this article.

This is a step-by-step guide to how banks and others assess you, and how to boost your ability to get mortgages, credit cards and more. It includes details on hidden fraud scoring, a trick to instantly get all your credit files for free, and the unique, quick Credit Checker tool that assesses your history and allows you to work out your credit weakness.

Get a loan, mortgage, overdraft, credit card, contract mobile phone or even monthly car insurance and lenders ‘score’ you to predict your likely behaviour. Scoring systems are never published and differ lender-to-lender, and product-to-product. So just because one company rejects you, it doesn't automatically mean another will.

Credit scoring doesn't just dictate what products you'll receive, but also how good the ones you actually get are. For example, most loan rates are ‘typical', meaning the APR depends on your credit score; with credit cards, if your score's too low for the sexy deal you wanted, you might get accepted but sent a different product.

There are two big myths to clear up though…

Universal credit ‘ratings’ and ‘blacklists’ DON’T exist.

It mightn't feel like that though, as while each lender scores differently, the information they use is similar. A bad risk for one lender is often a bad risk for others too. You'll be given a different credit rating by each of the three credit agencies (a snapshot on the day you get it). But lenders use that score as just one part of their decision to lend, and each lender will look for a different type of borrower.

Lenders aren't obliged to dole out credit.

Applications are aggregated into millions, and banks prefer to deny a few good quality applicants rather than overspend on personalised vetting procedures or accepting large numbers of unprofitable customers.



It’s all about how financially attractive you are...

Many people still find it deeply frustrating that they get rejected. Yet as the saying sometimes goes, “it's not you, it's them”. While it's crucial to check for errors and do all you can to be as attractive to a lender as possible, sometimes you just aren’t what they’re looking for. Think of it like this:



Jane Bank and Sarah Lender are out on the pull. Neither like guys who are overweight, and both are looking for dark hair, dark eyes and good looks. Yet while Jane leans towards guys with a stubble, Sarah likes a clean shaven man. While Jane likes intense men, Sarah values a sense of humour. So while there's lots of guys they both reject without question, and some they both lust after, they can still end up fancying different blokes.


Credit scoring works the same way. Different companies are looking for different things so a rejection by one doesn't necessarily mean a rejection by all. Yet some borrowers are unattractive to almost all lenders so if you're a bad risk most will turn you down. However, a few (very few in the credit crunch) may have a fetish for those with poor credit histories as they can charge more.

And sadly for those rejected, just as when the guys ask Sarah or Jane why they're not interested, they just say: "Cos I don't fancy you," and that's about it. We don't always get to know other than: "Your credit score wasn’t high enough."



The aim of this guide is to make sure that lenders see you in the best possible light, that when they’re looking at you, you’re always dressed up to the nines, looking as hot as you can, and your skirt/shirt isn't tucked into your pants without you knowing.



Credit scoring's about profit not risk...

This is so important, let's make it as clear as possible.

Even good risks can be rejected simply because they won't make the bank money!

Banks pick customers for their own good, NOT yours, so the scoring process is about profit not risk. Of course, risk plays a part, as those unlikely to repay are a threat to profits. Yet even the most solvent may be rejected if they're unlikely to act in a way that'll generate profit for lenders.

The credit crunch has only magnified this. The sooner we understand banks are there to make money, not help us, the better we can play the system

It’s about sophisticated customer weeding

At the high end, the whole process is about lenders picking their perfect customers, and their reasons for rejection can seem bizarre on the outside, but make perfect sense to them. For example…

Credit card companies may reject you for always repaying cards in full.

While you feel like the perfect punter, for credit card companies, you’re a nightmare. If they can spot this trend, you’re likely to be rejected. The most profitable credit card customers are those who are perpetually in debt, never defaulting, but always managing to meet the minimum repayment.

Pay off in full every month, don’t use cards enough, or always shift debt to 0% cards, and if they can spot you, they may reject you.

Banks score you based on products they'd like to sell you in future.

Imagine this scenario: a bank wants new mortgage customers, yet that’s a costly sell. Instead, it draws you in with a current account paying a high rate of interest on a small amount kept in it. Yet, when you apply, rather than scoring you as a bank account customer, it could actually be scoring to see if you’re likely to be a profitable mortgage borrower in the future.


What they know about you
Banks use a variety of information to make their decision whether to lend to you, including data held by three companies known as ‘credit reference agencies’: Experian, Equifax and Callcredit. Yet the info they have is by no means comprehensive.



What banks know about you…

There are three prime sources of information used for scores.

The application form.

Here, lenders obtain the crucial details of your postcode, salary, family size, reason for the loan and whether you're a home owner. Ensure you fill the forms in carefully. One slight slip, such as “£2,000” salary rather than “£20,000”, can immediately kibosh any application and possibly future ones too. See the fraud scoring section

Past dealings with the company.

Companies use any previous dealings with you to help assess your behaviour, though complicated data protection rules can limit which separate units of a company can communicate to each other. This could mean if you've behaved well with one company, but poorly with others, it's more likely to give you credit.

Credit reference agency files.

Experian, Equifax and Callcredit compile information, allowing them to send data on any UK individual to prospective lenders. All lenders use at least one agency when assessing your file. This data comes from five main sources:



Electoral roll information. This is publicly available and contains address and who lives with whom details.

Court records. County Court Judgements (CCJs) and Bankruptcies indicate if you have a history of debt problems.

Search, address and linked data. This includes records of other lenders who've searched your file when you've applied for credit, addresses you're linked to or other people you have a financial association with.

Fraud data. If you've committed a fraud (or someone has stolen your identity and committed fraud) this will be held on your file under the CIFAS section. More on that below.

Account data. Banks, building societies and other organisations compile details of all your payments and transactions on credit/store cards, loans, mortgages, bank accounts and mobile phone contracts. In theory, they could also hold your record of paying utility bills, though few, if any, utility firms submit the necessary data.

Around 350 million records a month are tracked including details 'default data', where you're officially in default, and 'full data' which incorporates how you generally operate the account, from being the model customer to defaulting.

‘Default data’ has always been shared by financial companies but now ‘full data’ is shared too. This means each lender now has access to all information about you from other organisations.

Now, the 'full data' that credit card companies share about you is increasing. From 1 December 2008, Barclaycard, Capital One, GE Money, HBOS and MBNA began sharing a lot more.

As well as your available credit, actual debts, and whether you've missed repayments, they'll include the amount you repay (ie, if it's the minimum, or repaying in full) and whether you've a promotional deal (plus, if you use credit card cash advances, which you NEVER EVER should).

While, overall, the aim is to stop irresponsible lending, we suspect lenders are salivating that they'll now have info to score out those customers who play the system, and constantly shift from 0% to 0% deals.

What banks don't know about you…

There are many myths about what information is held on credit files. Don't be fooled, though. They hold an enormous amount of financial data, but not everything.

The following things are NOT listed on your report that lenders can see:

Parking or Driving Fines. Any fines you have incurred, for example parking or driving fines. Even though they’re issued by the courts they aren’t ‘credit’ issues so they’re not listed.

Race, Religion, Colour. None of these personal details about you are held.

Whether you've checked your file. While this info is held, and does appear when you check your file, it isn't passed on to lenders and doesn't play any role in any assessment of you.

Salary. How much you earn isn't on your file either, though you will usually be asked on the application form.

Savings Accounts. As savings are not a credit product they don’t appear on credit files.

Medical History. Medical problems you may have had in the past aren't listed.

Criminal record. No criminal convictions are listed.

Child Support Agency. Information from the Child Support Agency is excluded.

Information on relatives. Provided you don’t have any joint financial products (see later) there is no information about members of your family who live, or have lived, with you or any other third parties.

Student Loans (for some). Until recently, no info about official Student Loans Company loans was passed to credit reference agencies, unless you had a County Court Judgement (CCJ) against you for lack of payment. That meant they don't know whether you have one or not.

However, in early 2009, the SLC has said it will start including defaults on old-style 'mortgage-loans' which students who started Uni pre-1998 have, as part of credit reference agency data. This doesn't apply to the modern loans which are paid through the tax system.

Declined applications. Lenders can only see whether you've applied for credit elsewhere, not whether you've been accepted or declined. However, they may be able to guess by examining the credit accounts you have open.

Some defaults or missed payments. Usually, these stay on your file for six years, so anything before that may be wiped off. However, if you close an account, then missed payments could remain on your file until the sixth anniversary of account closure. With bankruptcy, it is wiped six years from the date you're declared bankrupt, as long as you're been discharged from the bankruptcy.


Check your credit files for free
As every company uses a different credit scoring procedure, pinpointing how any given one will view you is impossible. Yet keeping an eye on your general credit healthiness is important.

You’ve a statutory right under the Consumer Credit Act to write and get your files, yet this is slow and costs £2 per agency (see the officially checking credit files note). Instead, there’s a trick to instantly get more detailed info online for free at the two main agencies (see the section below). After you’ve done this, have a play with the quick, anonymous credit checker below to see if you can improve your score too.

How many and how often?

If possible, check all three agencies, as there’s no harm. While doing a check is recorded on your file, it does NOT add a ‘credit search’ that a lender can see, so has no impact. It's worth checking because an error can cause you a problem. It’s a good idea to do a check-up roughly every year to 18 months, and always do one in good time before making any important applications.

If time is short and you can only use one, then choose Experian or Equifax.



Check your file for free online...

Credit ratings have become big business. In the old days, the agencies made their money flogging their data to lenders, but our desire for credit means they spotted a lucrative market to sell it back to us too. Luckily, this leaves open a nice loophole.

The top end service offered is ‘credit monitoring', which costs around £70 a year (find out more about other credit services ). To tempt you in, they offer free month-long trials, which require you to set up a Direct Debit or regular credit card payment.

Of course, the aim is you’ll not bother to cancel it when the month’s up so it still drips from your account, so much so, often it may look like you're just signing up for a freebie, until they ask for your card details, that is.

The Trick…

As part of the monitoring service you get to see your credit file online whenever you want, and laid out in a much easier to understand way than if you order the statutory file.

Therefore sign up, then view your file at no cost (you may be able to do this instantly, though may have to be posted a passcode), and then cancel the subscription. Even though they allow 30 days, it's best to cancel straight away, as leave it a month, and you may forget.

The different systems are as follows:

Experian’s Credit Expert.

Details: Credit Expert* offers a ‘free 30-day trial, then £6.99 per month' service which includes your credit report, so if you want your credit reference file just sign up and cancel this. Don’t confuse it with the Credit Score service which costs a one off £5.95.

How to cancel: It makes it very easy, just call the free-phone number 0800 656 9000.

Equifax’s Credit Watch Gold.

Details: Credit Watch Gold* has two options, one at £7.50 a month, but the one you need to choose is the ‘Free for 30 days and then £69.99 for the year'. When you sign up, a payment card will need to be authorised but the £1 fee is not actually charged to your card if you cancel in time.

How to cancel: To request cancellation call 0870 0100583 and quote your account reference.

If you're worried about hassle, then the best system is simply use the official credit checking system.

Get paid to check your file

And even better, you can sometimes get paid up to £7 to check your credit file if you go via a Cashback Websites. It’s worth checking.





What to check on your file
Once you’ve got your credit files, the key is to check the accuracy of the info that banks are judging you on. As we're talking billions of pieces of data, there are always mistakes. So, quite simply…

Check EVERYTHING! One mistake can be a hammer-blow to credit applications

First, the obvious stuff. Are all your debts correctly listed? Are there any inaccuracies on your repayment history?

Yet other details are important too. Check your present and past address details. Errors here can lead to you being judged on someone else's credit history. Also, your finances may be incorrectly linked with someone else's. Focus especially on any currently active accounts. If they're still open, even if you haven't used them for years, it can cause problems.



What to do if there's an error?

If you disagree with anything on your file, just write to the agency and request it's changed. If the agency agrees it should quickly change the file, though sometimes you'll need to talk to the company that originally filed the data.

Unfortunately, sometimes it may refuse to amend your file. If this happens you're entitled to add your own comments as a ‘notice of correction'. This will often mean your credit applications take longer, but it may help you to obtain better deals.

Don't go on too much when explaining the error, though, and don't overly berate. Be concise, explanatory and factual.


Fraud Scoring... the hidden credit killer.
When you apply for a product, it isn't just a case of assessing whether you're desirable, but also checking that the application is legitimate. Therefore, as well as the credit reference agencies, lenders also use completely separate anti-fraud agencies to try and weed out problems. The two big ones work in very different ways

National Hunter. Spots anomolies on application forms, so be consistent

How it operates. This system's much less factual and therefore is prone to greater errors. However, it's used by almost all major banks and building societies, receives 100,000 applications a day and has a real impact, yet is very rarely mentioned.

It works by looking for inconsistencies between your current application form and any past applications you've made, trying to spot factual errors. While it can't block your application itself, it triggers a red warning flag to lenders, and this happens roughly 1 in 20 times. Lenders can then check the info, and either ignore it, or do further checks. They are not allowed to reject you based on the National Hunter ref flag alone.

Things like a number of applications in a few days can also trigger warnings, though generally that's more acceptable with mortgages where it's more common than with credit cards.

What to watch for. It's crucial to be consistent, even over long periods, when you fill in application forms. If you have a number of job titles or phone numbers try and use the same one, on every application. Changes to guidance introduced in 2009 mean lenders are supposed to tell you if National Hunter has been a contributing reason for your rejection.

Check your file. To check the info it holds on you, it's necessary to write to it making a data protection request and enclosing £10. The National Hunter website explains this. This can also be a useful thing to do if you think you're a victim of ID fraud.

What you'll get is effectively a list of the information you've put on past applications. If there's an error on the file, which is possible, you can't correct it directly with National Hunter, you'll need to go back to the lender who submitted that application to have it corrected.

CIFAS: Lists confirmed past fraud

How it operates. It is simply a record of known fraud, so if you're on there, in general, you should know about it. It's also the organisation to speak to if you think you've been a victim of ID fraud. Worryingly, any fraud committed at your address could appear on your CIFAS file, even if you did not commit the fraud.

Though like with National Hunter, a lender cannot refuse your application based on the CIFAS data, but must investigate first. Hopefully, that should prove you were not the perpetrator.

Check your file. The info it holds on you should be contained on your credit report under the CIFAS section. For a £10 fee, you can also request a copy of any files CIFAS holds on you (which is hopefully nothing). Full details on the CIFAS website.

If you've a dispute with the info held, you need to contact the company that logged the information on your CIFAS file first. If you're not happy with the response, once you've recevied a final response letter, you can then contact CIFAS to investigate.

For more information on ID fraud protection see the free ID fraud help guide.


Manage and improve your credit score
Once you know what lenders see, you are in a better position to sway their opinion. You do this by thinking tactically and behaving appropriately. Unfortunately though, there's no magic. After all, every lender does it differently, but there are easy ways to improve the odds.

A quick note, though. You may've seen adverts for credit repair agencies promising to improve your ‘rating' for a fee, yet there's nothing they can legally do that you can't do yourself for nowt (find out more about credit repair agencies ).



The quick Credit Checker tool...

Answering ten quick questions gives you a rough indication of how good a risk you’re likely to be to lenders. Of course, risk isn’t everything, profitability is, but this is a good clue to general attitudes.

Don’t be afraid to play

The most used credit reference agency, Experian*, provided the calculations and data to build this tool, so the results are kosher. Try playing with different answers, and see the impact on your score. Once you’ve pondered the list below and thought what you can possibly improve, plug some different answers into the checker and see if it affects the results.







Improve your credit score...

While it's not an exact science, there are a number of specific things you can do as good practice to improve both your credit score and lenders' attitudes towards you.

Get on the electoral roll.

If you're not on the roll, it's unlikely you'll get any credit. Write to your local council to ensure you are. Do it immediately, don't wait for it to send round the annual forms.

For those who aren't eligible to vote (mainly foreign nationals), send all the credit reference agencies proof of residency and ask them to add a note to verify this.

Time applications correctly.

Lots of credit searches, the notes left on your file when you apply for things, in a short space of time hurt your score. Space out applications, not just for credit but for car insurance, mobile phones and others, as all can leave searches on your file.

Moving house also disrupts a score, so make important applications pre-moving. Plus, you'll score better when you're earning, so if you're about to take time off, go on maternity leave or suspect potential redundancy, apply beforehand - though never lie on applications, if asked.

Building a good credit history/repairing past problems.

Credit scoring tries to predict your behaviour. If you've no credit history it's more difficult for lenders to do this, so you're more likely to be rejected. Therefore, both for those with poor and no credit histories, you need to build a good one.

Use ‘expensive’ credit cards.

If you can't get credit, sadly, the solution is apply for hideous 30%-ish rate credit cards offered by the likes of Barclaycard Initial*, Capital One Classic*, Monument, Aquacard* and Vanquis*

You can also try the special Smartsearch from comparison site MoneySupermarket*, which effectively assesses your credit worthiness (a bit like our Credit Checker), then tries to match you up with the best card.

Importantly, it doesn’t do a credit search, as that itself would hit your credit score. Instead, it just asks a few basic credit history questions and works with credit reference agency Equifax to give a rough and ready assessment, followed by indicating ‘suitable cards’.

To help rebuild your credit rating, you can use these for six to twelve months, spending a little every month. It's even better if you can use two cards to build more data. But there is a vital golden rule....

Strictly repay EVERY month, in FULL, so there's no interest cost.

After that, you should've built a credit history allowing you to move into the mainstream. This tactic is also useful for those who've defaulted in the past.

As a last resort pay for a special prepaid card.

If you've been rejected for cards like this, there is a 'last resort' solution. The Cashplus Creditbuilder* is a prepaid card costing £9.95, meaning you have to load it with cash before spending, rather than having a credit facility.

Cunningly, it charges a £4.95 monthly fee, which technically counts as a £59.40/year loan. As long as you pay the fee every month for a year, this info will be passed on to credit reference agency Experian.

Crucially, though, no credit check is needed to get the card. Once you've made 12 payments, it should show on your credit history as a fully repaid loan agreement, making you a more attractive customer (to those companies that use Experian for credit scoring, which is the vast majority of them) and hopefully meaning you can apply for better credit card and loan deals. Though you are, of course, paying £70 for it!

For more details on this, including pros and cons, read Cashplus Creditbuilder discussion.

Keep up payments and never be late.

Always try to follow at least the minimum repayment plan for your financial products. Even if you're struggling, don't default or miss payments. Doing this once or twice could cause problems that can cost you for years (though you may be able to get past charges back – see Bank Charges Reclaiming article). Though those in the previous 12 months will hurt you the most.

If you are in difficulties, the cliché 'contact your lender' is a good one. Hopefully, it will try and help a little. Changing your repayment schedule is preferable to you defaulting - and though it will hit your credit score, it's better than a County Court Judgment (CCJ) against you.

For repaying credit cards, the simplest method is to set up a Direct Debit to repay it each month. Then, you'll always hit the key criteria. If you have to, just do it for the minimum repayment, but then always try and pay extra by web, phone or post to get rid of the debt quicker (see the minimum repayments guide)

Marriage doesn't hurt, joint finances do.

Simply marrying or living with someone with a bad credit score shouldn't impact your finances, as third-party data (ie, someone else's info) doesn't appear on your file.

Yet if you're 'financially linked' to someone on any product, it can have an impact. Even just a joint bills account for flat sharers can mean you are co-scored. If one partner has a poor history, keep your finances rigidly separate, and it should maintain access to good credit for the other.

In fact, there are only two common products that can infer financial linking: mortgages and joint bank accounts. As a note, there's no such thing as a ‘joint' credit card. Technically, it's one person's account and the other just has access to it. It is technically possible that joint utility bills could be reported on credit files, though current practice is not to do so.

If you split up with someone you've joint finances with, once the accounts are separated or no longer active, always write to the credit reference agencies and ask for a notice of 'disassociation', to stop their credit history affecting yours in future.

Get a 'quotation search' not a 'credit search'.

If you're just trying to get a specific quote for a loan, ask the lender to do a ‘quotation search' and not a ‘credit search'. This means the enquiry won't have a negative impact on your credit score. Sadly, many lenders haven't yet adopted this practice, but it is worth asking. If not, consider whether you really want to get a quote - if it's unlikely you'll get the product, don't bother.

In both the Personal Loan and Credit Card Balance Transfer articles, there are details on special comparisons available to find out who's likely to accept you, without actually applying. Plus the credit checker gives you an idea for free of the type of cards you’ll get.

Frankly, this situation is a disgrace, we should have a right to know the rate you’ll get before applications go on credit files. Apply for a product and it puts a search on your credit file which hits your credit score, yet many products are rate for risk, without applying you can’t know the rate. This vicious circle thats hurts comparing products should be stopped. Until it does, be careful.

Evidence of stability is good.

Home owners rather than renters, and those who are employed, rather than self-employed, tend to be accepted more. Putting a fixed (land) line rather than a mobile number on application forms can help with security checks and improve your chances. Being with the same employer, bank and current address for a while all help too.

Check the address on all active accounts.

You may not have used your old mobile contract or credit card for five years, but if the account is still listed as open and you had a different address this can stymie applications due to ID checks. Check your file and go through every active account's address to ensure it's up to date.

Avoid the ‘rejection spiral'.

There’s a nightmare scenario you need to avoid, called the rejection spiral. It works like this:

You apply.
You get rejected (sometimes falsely, due to an error).
You apply elsewhere.
You get rejected again.

This continues, until finally you check your files and get the error corrected.

You apply again
You’re rejected, not due to the error, but because of all the recent ‘searches’.

Thus, if you're rejected once, immediately check the files are correct, otherwise you may mess up your score for an age as more applications mean more searches, which compounds the problem. You'll be told by the lender which credit reference agency it used to assess your info, so focus on that.

It is possible after an error to get successive searches wiped, but it involves negotiation both with the agency and the lender, and isn't easy.

The rejection spiral also applies when you apply for credit normally reserved for those with an 'excellent' score when you, say, only have a good score (sadly, many lenders do not publish their criteria so it's difficult to know in advance). So you're a perfectly acceptable risk for most, yet once you get that first rejection, it can harm your chances of getting further credit because a search has been registered. So check your file and call lenders you plan to apply to in advance to check.

Dealing with defaults on your file.

One of the major problems people face are past debt defaults on your file, these can easily hamper most apppications to get new credit and if they're genuine and fair are tough to deal with. There are a few things you can try though especially if the default is unfair.

Complain to the Ombudsman. First write to the company and complain the default isn't fair and lay out your terms. Ask it to wipe the fault from your file, which it can do if it's disputed. If that fails, complain to the Financial Ombudsman the free independent arbiteur of disputes, it can rule both that the debt is unfair and that the default can be wiped.

Negotiate with the lender. If you are prepared to settle the debt, either in part or in full, then you can enter a negotiation with whomever you owe the money. As part of this you can make a condition of settlement that the default is wiped off your credit file. Companies are allowed to do this for disputed defaults.

Add a 'Notice of Correction'. If all else fails, and you believe the default's justifiably unfair, add a notice of correction to the file explaining the problem eg,saying: "It was a joint account and the debt was run up once I no longer had access by my errant ex-husband/wife." This will slow applications down, as most companies will look at it manually, but as a substantial default is likely to stop you getting credit anyway, that's usually not a problem, providing it helps.

Cancel unused credit cards, debts and accounts.

Access to too much credit, even if it isn't used, can be a problem. If you have a range of unused credit cards, cancel most of them; this lowers your available credit and should help (see the Cancel Old Cards article for full info on what to close when).

However long standing bank accounts with good credit histories can be a benefit to your credit score, so they're often best left open.

Use any savings to pay off debts.

The amount of outstanding debt you have is part of the info lenders have access to, so minimising this is a clever strategy. In general, you’ll be better off by using savings to pay off expensive debts anyway (read Pay off Debts with Savings).

With the credit crunch biting, this is particularly true if the product you’re applying for is a mortgage. People who haven’t paid much of their mortgage debt off are struggling to get decent new deals (see the Remortgage guide).

For those with an LTV (Loan to Value ratio) of over 90%, meaning your mortgage debt is at least 90% of the house’s value, getting a new mortgage has become very difficult. For those with an 80% to 90% LTV you should get a new deal, but it won’t be too cheap.

So if you have savings, and can use them to significantly lower your mortgage borrowing, enabling you to get a better deal, it's often worth doing. The extra amount your savings will earn isn’t likely to be as much as the benefit from a cheaper mortgage. Read Should I Pay Off My Mortgage?

And a final thought. Though it may be tempting, lying on your application form doesn't help. Firstly it's an offence, but also if lenders can't corroborate your information you may well get rejected anyway.