A guide to credit scoring
As you probably know, a credit score or "rating" is important to anyone trying to obtain anything from a new credit card to a loan.
A lender will use your score to help assess an application for a loan and thus decide on the risk associated with lending money. The risk that is decided on will affect whether a customer is accepted for a loan and if so, the interest rate associated to the proposed loan.
Each individual lender will have their own criteria for how to judge your risk. A good credit report is not a guarantee to be accepted for a loan, but it helps.
Any individual can get hold of their own credit report to see their rating, and perhaps take steps on how to improve it by evaluating the information on it. The standard cost of a credit report is £2. However some credit report companies offer 30 days free-trials. Be sure to cancel your subscription before the 30 days expires so that you are not hit with charges. By checking the report, you may be able to improve your rating if there are mistakes on it – if so you should inform the credit agency.
A credit report usually holds the following information:
- A list of all your credit accounts (including bank and credit card accounts).
- Details of any person who is financially linked to you (joint accounts for example).
- Public record information such as County Court Judgments (CCJs), house repossessions and bankruptcies (which stay on record for six years in total).
- Your current account providers.
Your credit file also includes your personal situation details such as your name and date of birth, current and previous address, whether you are or not on the electoral register, and if you have committed a fraudulent act.
Tips to improve your credit rating
As mentioned previously, the first step should always be to obtain a copy of your credit report and check for mistakes. If you find any, then report them to the credit agency so that they can be removed, which should then improve your rating.
Cancel unused credit cards: unused cards can actually affect your rating as they act as existing credit available to you so could restrict getting “extra” credit. If you have no intention of using a card again, then cancel it.
Don’t make multiple finance applications: If lenders see an individual making multiple attempts to obtain finance, they may interpret this as a sign of desperation and also a sign of impending financial difficulties.
Applying less frequently suggests greater stability in your financial affairs.
Do not tarnish your rating by association: Avoid financial links with anyone, individual or organisation, which has a mixed credit history. For example, if your partner has a poor credit rating, it may be in your interest not to have a joint account.
Pay your bills on time: Pretty self-explanatory, but missing payments on bills could have a detrimental effect on your credit rating. What’s more, by paying on time, this portrays you as dependable and in control of your financial affairs.
Make sure you are on the electoral roll: Again this is good for your rating as it suggests stability and also community involvement, which is always a plus with lenders.
Have a landline number: Again, this suggests stability to a lender.
Stay at one address: Stability etc.
Do not lie on credit application forms: Inconsistencies can have a negative effect on your credit score and may even be considered fraudulent.
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, there are fees, so tread carefully.
And one extra obvious tip – reduce your debts!
For a 14 DAY FREE TRIAL credit report, please visit our partners over at UK Credit Ratings