Credit rating – what’s the score?
The importance of your credit history is not overrated. Your credit history information is of interest to a lot of people. A bad credit history can make it harder for you to obtain loans and even a mobile phone contract. Landlords and potential employers can and will also look at your credit history report.
Banks have changed the way they decide to lend money since the financial crisis. Essentially, the lenders now want to take fewer risks with their cash.
Basically, being granted a credit facility enables you to repay over a set term usually having interest added and paid back with the initial advance on a monthly basis.
A credit check doesn’t just dictate what products you’ll receive, but can also determine the rate of interest you will be charged. For example, most loan rates are ‘representative’, meaning the APR (Annual Percentage Rate of charge) depends on your credit score/ rating; with credit cards, if your score / rating is too low for the fab deal you wanted, you might get accepted but not on the terms advertised.
Whether you are approved for new credit isn’t a simple calculation based on how much you earn. Nor is it about some mythical ‘universal credit rating’ or blacklist.
Lenders evaluate you to predict your likely behavior in relation to the product you apply for.
Kevin Harris, Managing Director of Acorn Advisory Ltd, says that he considers each application for credit on the 3 C’s:
- Character – residential and employment status and stability, age, previous management of credit, what you want the money for etc. – this is basic ‘Know your Client’ stuff.
- Capacity – affordability of the monthly repayments, (Acorn will review bank statements and your personal budget).
- Collateral – can Acorn secure the loan? Is there an asset, for example the car being the security / collateral on a car loan.
Kevin urges all loan applicants to ‘be honest with the information they provide’ if you are economical with the truth it may come back to haunt you and adversely effect your current and future credit application.
Also remember that short-term high rate loans are not the answer to pay any outstanding debts or living expenses – as inevitably the short-term loans will attract higher and higher interest rates– compounding your debts and liabilities. Instead if you find you are tempted down this road seek help from either your bank, lender, Citizens Advice Bureau or Community Savings Limited.
Paying rent and household utilities doesn’t mean you have a credit history, as these may not be recorded with the credit agencies. While you do need to pay these, doing so doesn’t have much of an impact on your credit rating.
The twist? NOT paying the rent and household utilities could show up negatively on your credit history because you’ve failed to pay as agreed, resulting with a judgment which will be detrimental to your credit rating
Kevin goes on to say that increasingly we are seeing more information relating to monthly mobile phone contracts and mail order payments. The credit reference agencies categorize these, for example mail order and communications so your credit history is detailed and illuminating – there is nowhere to hide!
The whole game of credit reports is a convoluted one. Importantly, if you are concerned or wish to keep a track of your history you can check the information held about you with the three UK based credit reference agencies and the local agencies.
How credit history reports work
A credit history report shows how you’ve managed your credit so far. Every time you pay your loan installment, credit cards or apply for credit, you’re adding to your credit history, and that information is noted by credit reporting agencies. If you fall behind with payments, this information will also show up in your credit history,
Your credit history is used to assess the risk involved in lending you the money, the higher the risk, the more chance you will be declined or charged a higher rate.
Remember that it is a continual two-way flow of information between loan companies and credit reference agencies, not every agency holds the same information, some Banks and Finance companies supply data to all the agencies and some only to one or two. Agencies may also hold information relating to bank accounts and over drafts etc.
What can you do to protect your credit history?
Get your credit report (always check how much this will cost; whether you are buying a one off or a monthly report, attracting an ongoing charge) and take steps to monitor your credit. Proactively managing your credit history will eliminate any unpleasant surprises for you when lenders, property managers, and potential employers investigate your financial reports. You can put a file note of correction on your report – for example if you went through a divorce and joint credit cards were unpaid during the settlement phase and you dispute your side of the liability, you could indicate by way of a correction that this was the reason to provide a more balanced credit picture.
Building a good credit history takes time and patience. Make your payments on time, and carefully manage your open accounts. By managing your finances responsibly, your credit history will improve, which should eventually have a positive impact on your credit score / rating.
The problem is we don’t give credit the amount of thought we should; at its best, credit can help us manage our financial lives. At its worst, it can get us into serious financial trouble. And it’s important to think about the future. You don’t want your credit history to get in the way of achieving personal or professional goals
Channel IslandsChannel Islands Credit Reference Agencies
Channel Islands Data Service Ltd
Trades Advisory Bureau (TAB’s)
P O Box 4
Jersey (C.I.) JE4 8NB
Tel: (01534) 508855
UK Based Credit Reference Agencies
Credit File Advice Centre
PO Box 1140