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Credit Ratings: The Factors That Will Contribute Towards Your Score

Credit ratings or scores are a constant source of frustration and even anxiety to millions of us. This is especially so in our culture of borrowing and debt. It also mystifies many people, who don’t truly understand the mechanics of a credit rating. They also do not comprehend the full details a credit report contains. For that reason, I thought I’d have a look at the ins and outs of a credit report, covering the odd myth or two along the way.

When you consider a credit score, it is helpful to think of the score being comprised of sections that all contribute to a final score. Or, if easier, slices of a pie – like a “pie chart” in fact. Each contributory factor influences the final rating. Within each slice, various factors contribute, be it the number of loans you have taken out, or how timeously you repaid those loans.

Payment History

The single largest slice is taken up by an individual’s payment history. Credit bureaus decide a score via many factors. But a large chunk is attached to how you have paid your bills or your short-term loan in recent years. Key is whether you missed payments or not. Making payments on time and paying your bills or loan has a big effect on your score. Missed payments can hang around on your report for six years. County court judgments (CCJs), decrees, IVAs, bankruptcies and other court debt orders tell a lender if you have a history of debt problems. This includes if someone has taken you to a small claims court.

Debt

Debt takes up the second largest slice. This factor will constitute almost as big a chunk as your payment history. Having debt in itself is not a bad thing. In fact it can be good for your score. It all depends on how you took out the debt and how you handle it. If, for example, you owe significant amounts of money and/or are close to the limit on a number of credit cards, then this will lower your score. Put this together with the largest slice and you can see the devastating effects. Maxing out credit cards and missing the odd payment can have dire consequences. Not all debt is bad though. It can actually be worse to have no credit fingerprint at all. It means that possible lenders have no evidence of how good you are at making repayments, making you something of an unknown quantity. Thus, having some debt, such as a short-term loan or credit card, and making timeous payments, is great for your score. Just ensure you make those payments and don’t max out endless credit cards.

Credit History Length

That leaves the credit bureaus to determine just over a third of your credit report. The next determining factor is the length of your credit history. Naturally, the longer the better, especially if you have been well-behaved. New credit refers to the effect opening various new lines of credit in a short amount of time can have on your rating. It suggests to potential lenders a sign of desperation. Or you they consider you to be “over-extending” yourself. Types of credit is the final factor in determining your credit score. Good types of loans can help you, and these include mortgages or auto loans.

Stability

Even though I’ve mentioned the oft-quoted set of criteria, I’ve not told the whole story. There are other factors that fit into the narrative. One is stability. Don’t hang around in one residence just because you’re worried about your credit score. Do realise that whilst lenders all have their own little rules about what makes an attractive borrower, stability is always a good thing. Staying in one place is part of projecting a stable image. Even having a landline listed can help project an image of stability and respectability.

As for fixing a poor rating, there is no quick fix, but basically do the opposite of everything previously warned against. Don’t take out endless credit (but do have some), make payments on time. Basically appear stable, appear a low risk. Do all of that, and with time your score will increase steadily.

Dealing With Defaults

As previously mentioned, defaults remain on a credit report for six years. However, it is possible their influence will diminish with time. A lender is fluid with decision-making. Each one develops their own set criteria away from your set score. A missed payment a few years ago may not overly-concern them. Explain on your report why the default occurred by sending a “notice of correction” to each of the three credit reference agencies. These are Experian, Equifax and Callcredit. After all, lenders are legally required to store accurate and up-to-date information at all times. Should you check your credit report and find an account that has not been updated, you can request that the credit reference agency to contact the lender. The entry will be clearly marked as disputed until you resolve the matter.

Myths

You can find a lot of the myths about credit reports in this article: finance and credit myths debunked. Basically, like most areas of life, what is generally perceived to be true is not the case. There are no such things as blacklists, previous residents that live with you should not have an adverse effect on your rating and checking your score will not damage your reputation.

Other Factors

There are other small factors too that are all added into the mix. Big energy firms do hard credit checks that leave a small footprint on your file. Banks, building societies, the aforementioned utility companies and many other businesses uses credit reference agencies. This is to share your account behaviour on cards, loans, mortgages, bank accounts, phone contracts and more, from the previous six years. Lenders may share “full data” too. This can include how you operate your account, from being the perfect customer to defaulting. Some may even share the amount you repay too. Councils do not share payment details, even if your record is bad. They can prosecute you though for defaulting, so in a roundabout way it can still end up affecting your credit rating. Reports do not list criminal convictions.

Changing Algorithms

The nature of credit reports has changed over the past decade. The emphasis on what matters has altered. Nowadays, the emphasis is towards “rate for risk”. What this means is that potential lenders are not just using credit checks to decide whether to lend to you, but also to decide on what rate to charge, by analysing risk in lending to an individual. Take representative short-term loan rates for example. They must offer the representative rate that accompanies such a short-term loan to the majority of customers. But because of your credit report and what lenders see in it, and the risk associated therein, lenders will offer a significant minority a different rate. This may be higher than the short-term loan’s representative rate. In a similar vein, if a lender accepts you for a credit card, the length of the introductory offer might be affected by how the lender interprets your credit report, or even offer an alternative product.

National Hunter

There is one final issue to discuss, and it concerns a system most people won’t know exists. I am referring to National Hunter, a non-profit company that runs an anti-fraud system utilised by banks and building societies alike. The system receives 100,000 applications a day, meaning it has a real impact on people’s attempts to obtain credit. The system operates by looking for inconsistencies between an individual’s current application form and forms previously submitted. If it finds any, it can trigger a flag warning to potential lenders. this is thought to happen 5% of the time. It is then up to the lender as to how they use this information. What they cannot do is reject a person just because of this flag. Whilst this is not going to have an adverse effect on your credit rating, it is worth knowing about when applying for credit.

There are no quick fixes to obtaining a good credit score, nor set-in-stone rules. The advice is simple for a good score, despite the numerous factors in play – have credit, but not too much, pay your bills on time, and aim for a stable life. This is the path to a good credit rating, and financial happiness.

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