Credit scoring is an art shrouded in mist. There are many confusions, so I want to try and clear away that fog.
Credit scoring is about predicting your future behaviour
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.
They do this by using three pieces of information, your application form, any past dealings they’ve had with you and the data held on your credit file with one of the three credit reference agencies.
In a way it’s quite intuitive. Imagine you’re in a pub and someone comes in, having lost their wallet/purse and wants to borrow £20. Now let me give you three circumstances.
My guess is you’d lend to it to Rod, but not the other two. Credit scoring works the same way – a good history of borrowing makes them think you’ll be a good borrower, a bad history or no history means they err on the side of caution.
The credit score you’re told about isn’t your credit score
The three main credit reference agencies all offer you a credit score – based on different measures. Yet it’s just a loose view of what a typical lender may think.
In reality every lender scores you differently based on its own definition of what is a profitable customer. Credit files should be checked annually and before any big application.
You have a file at each of the three credit reference agencies, which details all your credit transactions, how well you repay and whether you’ve had any debts or county court judgements. These days there are ways to see all three files for free via the web.
When you get the file, check it line by line for errors. 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 what put the kibosh on her application.
Six ways to boost your credit worthiness…
- Paying rent on time can boost your credit score. Private renters and social housing tenants can opt in to a free scheme www.experian.co.uk/rental-exchange so rent is now reported on your credit file and can thus boost your score if you pay on time.
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Perversely, the best way to (re)build your credit worthiness is to get credit and use it properly. Get a special credit (re)build card from www.aquacard.co.uk or www.marbles.com cards, even though it’ll have a hideous 34.9 per cent type APR. Spend £50-£100 a month on it (never withdraw cash) and ALWAYS REPAY IN FULL each month so you don’t pay the interest.
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Spread out applications: Multiple applications – especially in a short space of time – can damage your credit worthiness.
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Ensure you’re on the electoral roll. If not it can cause ID and tracing issues.
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Beware joint products if one of you has a bad history. If you have joint financial agreements – mortgage, loan, bank account or even a utility bill – one of a couple’s poor history could impact the other’s.
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Never miss or be late on repayments. Set up a direct debit to be sure it can’t be missed.
Martin Lewis is founder of consumer help site MoneySavingExpert.com.