Consumer rights expert Martyn James explains exactly how your credit score works and the biggest misconceptions that are commonly made
Your credit score is an essential tool for assessing whether you qualify for loans, credit and other types of lending. But how the score is calculated and the secrets of your credit file are a mystery to many people.
Don’t be intimidated though, because knowing a little bit about your credit file can bring you a great deal of financial confidence. Many of the problems that people encounter with applications for credit arise because of mistakes, misunderstandings and easily rectifiable matters.
So here’s my big guide to credit scores. I’ll also tackle common credit score myths to give you a bit of a boost if you’re worrying about your file.
What’s the difference between my credit score and my credit reference file?
Your credit score is a number that helps lenders and other organisations that might offer you credit to understand what risk you represent if they lend to you. The higher the score, the safer a prospect you are. Credit scores go up and down over time, depending on your finances, but even in the worst scenarios, they aren’t fixed forever – you can always turn them around, though sometimes this may take some time. Credit reference agencies set your credit score.
There are three main credit reference agencies in the UK that hold details about your credit. They are Experian, Equifax and TransUnion. You can request your statutory credit report for free (avoid the subscription services). If there is anything on there that is incorrect or unfair, you can appeal.
Your credit reference file is a kind of report that covers all of the data that credit reference agencies hold on you. This will include information on loans, credit cards and other financial borrowing or arrangements you have. It may also include details of other debts that you have that are outstanding too. The file will also record the number of applications for credit you make over a set period of time (usually 12 months on a ‘rolling’ basis). If you apply for credit too many times in that period, it can affect your credit score, as this suggests you may be struggling financially.
What about my personal information?
Your credit file will contain personal information too, so it’s vital that this is all up to date. Most important of all is being on the electoral roll. This tells businesses that you are who you say you are and you are living at the address you’ve got on file. If you’re not on the electoral register (or roll) then it’s dead easy to sort you. Just follow the guide on the GOV.UK.
Make sure your personal details are all correct as these may be cross referenced from time to time. So check that your birthday is correct and the time you have been resident at your last few addresses is accurate too.
At the more depressing end of the scale, your credit file will also include serious matters that are on the public record. This means bankruptcies, debt management plans and other court judgements.
How do I read my credit file or get my score?
By law, you are entitled to your statutory credit score for free. But this isn’t always so easy to find on the credit reference agency websites. Chances are you’ll find your way to the ‘paid for’ services first. Don’t mistake the two.
A paid for credit report service is one where you get a more detailed credit report, for which you pay a monthly subscription fee. You should be able to cancel this at any time, but do check that you have done so as loads of readers tell me they have forgotten, only to find they’ve been paying for a service they don’t use for a year.
Look for your statutory report on the website. You may have to make a formal request for this, but it is free, unless you want it posting out to you.
When you get your free or paid for credit report, it’s not always so straightforward to read or understand. The main thing to do is check your personal details are all correct. Then look at the records showing your existing or settled loans, credit or borrowing. These should show if you have ‘defaulted’ or missed any payments. If you spot any errors, you can appeal these through the lender. You can also mark any disputes over errors on the credit file itself through the credit reference agency.
I’ve been turned down for credit even though I have a good credit score – why?
When you apply to borrow money, a financial institution will check your credit file (with your permission). But they will often also conduct their own assessment of your credit worthiness, to see if you meet their criteria. They don’t have to tell you how this works. But if you ask, they must tell you if you failed their credit score, the credit reference agency score or both.
Credit score myths
There’s a big credit blacklist
The most common credit file myth is there’s a blacklist of people who are barred from credit forever (or for a long time). Luckily there’s no such thing. Lenders make decisions based on the information on your credit report, your application form details and any account information they already have. Even if things have gone a little awry in the past, then you could still be accepted but you’re likely to be offered lower credit limits and higher interest rates. The biggest blocker to credit is defaults, County Court Judgments, bankruptcy and Individual Voluntary Arrangements (IVAs) – and even they’re not forever.
The people you live with can affect your credit
Are you looking at your flatmate and blaming them for not getting a credit card? Don’t take it out on them. Credit reports these days are individual, and only contain your personal information. Living with someone doesn’t mean your credit reports will be linked or have any impact on each other, unless you’ve applied for joint credit together.
Being in a relationship links your finances
Being in a relationship doesn’t mean your credit report, or finances, are linked. The only way to link your credit reports is if you’ve applied for joint credit together in the past, for example for a bank account, loan or mortgage. If you have previously taken out credit with someone, but don’t share any joint accounts now, you can ask for a financial disassociation with all the credit reference agencies. However, joint credit accounts can leave you liable for debts as an individual if you fall out with your partner or get cleared out by the other person, so make sure you understand the repercussions before signing up.
Previous house occupants affect your score
This is a common myth, especially when people are living in rented accommodation. The previous occupants of your address do not have any impact on your finances or your credit report. There may still be letters that come to the address, so all you need to do is write on the front that they don’t live there and stick them back in the post box.
Hard and soft credit report checks
Checking your credit report doesn’t affect your score. It will show on your report as a ‘soft’ search each time you check, but this is only seen by you and nobody else. You can check your report and score as often as you like, which is usually a good idea before you apply for credit. ‘Soft’ checks are often used by some businesses as a way to see if you might get credit, for example, if you shop around and use an eligibility-checking service before pushing the button on a full application. However, ‘hard’ checks, created by you applying for credit, stay on your file for up to 12 months and can have an impact on your score if you collect too many.
I have one credit score
There is no universal credit score. Each of the three main credit reference agencies will give you a different score on a different scale. Of course, the higher this is with each agency the better. Do keep an eye on these scores and, from time to time, the data in the reports used to calculate them.
- Martyn James is a leading consumer rights campaigner, TV and radio broadcaster and journalist
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