Saturday 11 July 2015

Credit Ratings - Do they even matter?

Credit Report Photo from Shutterstock

We hear talk of our credit rating constantly nowadays. Can I take a mortgage easily? Not sure, they need to check my credit rating. Well, surely I can take out a mobile phone contract? No, not so quick, again a credit check is needed to see how I score. It isn't just the big expenditure nowadays like buying a house or car that result in your credit rating being assessed it is also the more every day like monthly paid insurance and even some bank accounts. But I wonder how many of us really understand what it all means and more importantly how we can effect it.

So lets start at the beginning, what is a credit rating? Investoedia defines it as "An assessment of the credit worthiness of a borrower in general terms or with respect to a particular debt or financial obligation."

It makes sense when you think about it, we only want to borrow money from a responsible lender, a company with a fair rate of interest, a sound plan for paying the money back and offering guarantees if there are any issues. So that responsible lender can only afford to loan the money to individuals that are low (or a calculated) risk and chances are will not default on their loan.

The way lenders find out the risk of lending money to an individual is to apply to one of the three main credit reference agencies - Equifax, Experian or Callcredit who will present your information gained from several sources such as public records, court records and lenders who often share credit rating information among themselves.

If you want to find out more information about how to effect your credit rating you can easily google it and you will find loads of credible sources of help like TSB, Experian, Money Saving Expert and Equifax but to get you started here is some information that I have put together to tr and give some basic guidance and bust some of he myths.

  1. There is no universal system in the UK and there is no such thing as a blacklist. In one way this is good but of course in others it makes things incredibly hard as the whole area of credit rating is not very transparent. Each lender will use their own algorithm to process the information from their chosen credit reference agency, joined with their previous knowledge of you as a customer or applicant.
  2. It is important to check your credit report for errors. Have you ever lived with someone with poor credit (in a student house perhaps) or had your purse stolen? These can both effect your rating so it is really important that you know what is on your report and you can apply to any of the three major credit reference agencies for a copy and then once you realise there is a problem you can take the steps to have the item removed from your credit report. Make sure you apply now as they will want to verify your identity by sending you a pin via post so you won't get the same day access. Martin Lewis, the Money Saving Expert recommends that you check all three files from Experian, Equifax and Callcredit as there is no universal data, so each can differ.
  3. If you split from a partner that you have been in financial arrangements with it is really important to unlink your financial affairs so you are only being judged on your merits. Also remember if you get a joint bank account with a flatmate to pay bills you are now credit related to this person. 
  4. Make sure to cancel all unused credit and store cards as well as expired contracts as old addresses and information on these can then cause a red flag on your credit file.
  5. Do take some credit. I have a friend who is in her 40's and the other day she told me she was turned down for a washing machine loan and she couldn't believe it as surely her credit rating was perfect as she had never owed any money in her life. I had to explain that there lay the problem, she was an unknown quantity, the lender had no idea if she could pay the money back as she had no history.
  6. If you do have previous problems, don't despair. There probably is a lender out there who will give you the money you need but you may have to pay a bit more in interest due to the risk associated with you and your history. If you want to be proactive and try to boast your credit rating them investigate a credit rebuild credit card.
  7. Some lenders will look for patterns. I know of friends who have been turned down for a credit card and could not understand why as they pay off their balance each month and another who likes to take advantage of all the 0% transfer deals out there but each of these friends are creating a predictable history and there is nothing in their habits that earns the credit card company money. I think sometimes we forget they are a business and want to make money too. Of course they do not want a complete liability who will pay nothing back but spenders who pay the minimum amount sometimes and then build a little interest before paying it off are a dream for them. This is why when I forget to pay my full bill prior to deadline occasionally I do not sweat it as it actually helps my credit rating.
  8. Your credit score will often effect the rate you are offered. This is why two friends could both apply for the same amount of money as a bank loan but each may have different terms, Again another reason to check and actively manage our credit report to ensure you can access the best that any lender has.
  9. When you are making an application for a product where your credit file will be accessed (loan, insurance, credit card etc) ask the lender if a 'soft search' or 'quotation search' is available as this will mean they can access all the information they need but it does not show on your credit file to other lenders (only to you). It can be detrimental to have too many credit searches showing in a short space of time as you appear desperate for money.
  10. I think it goes without saying that stability counts for a lot. Lenders like to see a consistent address, landline and tenure in your job. If you are constantly changing they get nervous.

There is so much more I could say, this is a massive subject and a really important one but I think that is enough to get you started. I'll just finish by saying - please don't bury your head in the sand, make sure you access your credit files and take any steps necessary now, whilst you can.

Have a great weekend, Mich x

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