Credit Scoring Guide 2018
When applying for a mortgage, whether you are a First Time Buyer or looking at purchasing your 2nd property, all lenders will look at your Credit Score.
Our guide will show you how knowing and checking your credit score can help save you from rejection of credit in the future.
What’s in the guide?
• What is a credit score?
• How to check your rating
• What information is contained within your credit report
• How your credit score is calculated
• What happens if you have bad credit
• Ways to improve your score
What is a credit score?
A credit report details your personal credit history from the previous 6 years, including mortgages, credit cards, overdrafts, loans, mobile phone contracts and even some utilities such as gas, electricity and water. If you’re over 18 and have ever taken out credit, a credit reference agency is likely to hold a credit report on you.
A credit score is an automated way for a lender to form an opinion on the hard data that is presented in a credit report. It will be based upon what a lender deems to be a ‘good’ risk for lending purposes, and different lenders will have different tolerances.
A credit score is used by lenders to determine whether you qualify for certain loans including mortgages, credit cards and other services.
When your credit score is high you are seen as a lower risk to lenders, making it easier to be granted loans.
How to check your rating
There are two main credit reference agencies that lenders use to gain information on your financial past. These are Experian and Equifax. There is a third, CallCredit, but this is not used as widely by lenders as the other two.
The job of a credit agency is to collect people’s credit histories from the age of 18, including whether they are on the electoral register, previous County Court Judgements and whether they have paid debts off in the past. Each time you open a new form of credit, from mobile phone contracts to car loans, this all leaves an electronic trace for credit agencies to track.
The credit agencies are a third party and have no say in whether a person is accepted or rejected for credit. You can access the information held on you by visiting the agencies’ websites or contacting them by post from the information below.
Type of information in your report
There are four main categories that are contained within everyone’s credit report. These include:
• Address details e.g. electoral roll information for your current address, plus any previous addresses
• Financial credit agreements e.g. loans, credit cards, mortgages and overdrafts. This includes any missed or late payments
• Public records e.g. County Court Judgments (CCJs), bankruptcies or insolvencies
• Financial associates i.e. if you have joint accounts, for example a joint mortgage with someone, lenders could take their financial behaviour into account when you apply for credit
How your credit score is calculated
Every lender will usually score each piece of information differently, therefore one lender’s score may not reflect another’s. When you apply to a lender, they will usually judge you based on three criteria:
• Your application details. This crucial information dictates whether borrowing is affordable. This plays a huge part in the lending decision because it covers information that the credit agency may not have access to (i.e. salary)
• Past lending experiences. Your own bank may be a better option for you if you have had a positive experience with them (i.e. no late payments or keeping out of overdraft)
– but, they may also be biased against lending to you because of a bad track record (i.e. late payments or staying in your overdraft)
• Credit report information. The information contained in your credit files that credit reference agencies base their own score upon
What happens if your application is declined
If a lender refuses you because of bad credit, it is not the end of the world. Each lender scores you differently on each piece of information, which may mean that another lender could score you higher than the one you originally applied with. If a lender has refused you, you may also be able to ask them to reconsider their decision if information has been found to be incorrect; for example, an incorrect number on your salary or an identity fraud issue you haven’t before picked up on. In this case, contacting the credit agency directly may be the best course of action.
How to improve your score
There are many ways to improve your score, but don’t expect
it to change overnight. Looking at your score before applying for any sort of loan is a good idea, so you can gauge where you need to improve. A change in score may take a few months so it’s best to plan ahead. Some options include:
- Being on the electoral roll – they use this as a way to check you’re who you say you are
- Make sure your name and address is correct on all remaining debts/accounts
- Don’t apply for credit too often
- Close down any accounts, such as credit cards, that you no longer use.
- Make sure you are not connected to anyone else (i.e. ex- partner) that may have a bad rating
- Keep up repayments you have by setting up direct debits
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