Martin Lewis, the Money Saving Expert, appeared on This Morning today to bust the rumours about credit scoring.
Credit doesn’t just cover loans and credit cards but banks also look at your monthly payments such as car insurance, and now paying your rent also now counts towards your credit score.
But what is credit scoring and when is it used? Martin explained all on the ITV programme, alongside boosting your credit score with your rent.
When you apply for credit – which isn’t just loans, mortgages and credit cards, it’s also energy on direct debit, bank accounts, monthly car insurance, contract mobile phones and more – lenders are trying to predict your future behaviour based on your past, Martin started.
He explained: “They do this using the info on your application form, any past dealings they’ve had with you and information held at one of the credit reference agencies (your credit file).
“If you’ve had problems, or you’ve no history to predict from, expect rejections or costlier products. Yet even if that isn’t your case, you have to understand every lender does this differently – seeing if you are likely to behave in a way that matches its wish list of what is a profitable customer. So just because one company rejects you, it doesn’t automatically mean another will. “
Can you find out your credit score?
Yes and no, accoridng to Martin. He said: “The three main credit reference agencies all offer you a credit score – based on different measures. Yet these should be treated with a pinch of salt. Each lender scores you differently based on their own wish list of what is a profitable customer.
“Many people get hung up on ‘my credit score has dropped 10 points because I cancelled a credit card’ – yet that’s just the credit agencies guess work on a small change. Different lenders can see that differently. Many people also complain that ‘I’ve got a perfect credit score but I’ve been rejected’.
“Yet your credit score misses some crucial information that lenders have on your application file. The most important one being your salary. They use that to do an affordability check, so even the best credit scorer can be rejected if they can’t afford to repay.”
So see the credit score you get as a loose indication at best.
Is your credit file different to your credit score?
Martin answered: “Yes. You have a file at each of three credit reference agencies, which details all your credit transactions, how well you repay, whether you’ve had any debts or county court judgements.
“It’s important to check these at least once a year and before any major transaction for errors. You can now do it for free, via signing up to some specific credit monitoring clubs.”
Experian is available for free via Martin’s Credit Club, Equifax is available for free via Clearscore, and TransUnion (formerly Callcredit) through Noddle.
Martin added: “If you don’t want to sign up to any of the above, you’ve a legal right to get your file for free – see Equifax, Experian and TransUnion (formely Callcredit).”
Martin’s tips to boost your credit file
1. Now paying rent on time can boost your credit score. Private renters and social housing tenants can opt in to a free scheme called Rental Exchange that records rental payments on your Experian credit report. If you pay on time, it could boost your score – and therefore your ability to get a mortgage, credit card etc. If you don’t pay rent on time it’ll hurt your score, so think carefully about joining if worried you may be late.The scheme’s actually been running in the background for over two years with 1.2million renters’ payments recorded, but the payments were only made visible in people’s files last month, so it now has a real impact on how firms score you.
2. Perversely, the best way to (re)build your credit worthiness is to get credit and use it properly. Of course this is a catch 22, the question is how do you get credit if you’ve a poor credit history. Yet there are special credit (re)build cards which are easier to get like the Aqua Advance or Marblescards. Get one of these then do £50-£100 per month of normal spending on it (never withdraw cash) and ALWAYS REPAY IN FULL each month so there’s no interest (they jump to a hideous 34.9 per cent rep APR if you don’t). Then after about six months to a year, you’ll start to gain a decent history. Just ensure you never miss or are late repaying. Best way to do this is through an eligibility checker which shows you which of these cards is most likely to accept you.
3. Spread out applications: More applications especially in a short space of time can damage your credit worthiness.
4. Ensure you’re on the electoral roll. If not, getting credit’s tougher, as it can cause ID and tracing issues. If you’re worried about junk mail, opt out of the ‘open’ register.
5. Beware even minor address errors. Sounds trivial, but isn’t. I once did a TV money makeover for a woman looking to buy a house, who couldn’t work out why she’d been rejected for a mortgage. It turned out she had an old, technically active but unused mobile still registered to her old home. That was the final straw killing her application.
6. Evidence of stability is good. While switching is something I’m usually in favour of, having a bank account for a decent length of time often helps your score, so don’t change just before a mortgage application. Plus putting a landline number down rather than mobile is good evidence of stability.
7. Beware having a joint product. If your credit file is linked to someone else through a product, lenders can see their history when you’re assessed, so be careful if they’ve a bad history. And by the way you can’t be financially linked just through marriage. It’s about whether the actual product is joint – so you’ve a joint mortgage, loan, bank account and sometimes utility bill.
8. Time your applications right. When you apply can have a big impact. Applications stay on your credit files for a year. Though bad stuff (such as defaults & CCJs) stay on for six. So if they lapse soon, wait before applying. Also avoid lots of applications in a short time. Spread them out and do the most important one first for example don’t apply for a bank account first if you want a mortgage.
For more of Martin’s money saving tips, visit the Money Saving Expert website.