Do you know the effect a credit rating has on your chances of borrowing money? Find out how to improve your rating so you can borrow more, for less.
Many people have never even heard of it, but your credit rating can make a big difference in your life. From buying a house to taking out insurance, the information held by certain companies can dictate your life.
What is a credit rating?
A credit rating is a financial evaluation of you. Using a number of factors, the rating determines what kind of risk you are to lenders. If you have a history of paying back money on time and have a decent income, then great. But miss a few payments, or have a brief borrowing history and you could see lenders giving you a wide berth.
Who provides the ratings?
There are currently three credit reference agencies, Equifax, Experian and CallCredit. Each agency collects information about you from various sources. This information is then passed on to lenders when you ask to borrow money. The lender may ask for information from any or all three agencies.
What are the main sources?
- Account data. This can come from banks, building societies and utility companies. They will provide the credit agencies with your information for the last six years, such as whether you regularly keep up to date with payments.
- Address, linked data and searches. This information includes places you have lived, anybody that you may have financial links to (such as a spouse) and any recent credit searches against you.
- Electoral information. This confirms where you live.
- Court records. This will show whether you have had any County Court judgements against you or other court debt orders.
What is a credit score?
All agencies give you a score. For example, Experian marks you out of 999. The higher the number, the more creditworthy they believe you are. But don’t become too obsessed with these numbers as lenders will not see them.
So why are you scored? One reason is that it gives you a simple way to see how likely you will be accepted for credit. Instead of you having to look through pages of data, you have one simple figure. But this is not the sole or even main reason. Credit scoring companies want to make money from you. If your score is on the low side, you can pay a fee to find ways of improving it. For example, Noddle (who represent Callcredit) charge £30 for Noddle Improve which claims to provide you with expert tips.
I wouldn’t pay too much attention to credit score numbers. Each lender will have different criteria when it comes to lending, so these scores on their own aren’t a great help.
10 ways to improve your credit rating
- Register to vote. Visit here and you will be placed on the electoral roll.
- Make sure all your payments are made on time. If you have a credit card, set up a direct debit so payments are never missed.
- Don’t make too many applications for credit. If you have a lot of credit searches against your name, this will be a big red flag. If you’ve been turned down a couple of times, wait before applying again.
- Close old accounts. If you have a credit card or store card that you don’t use or an old bank account with an overdraft, get rid of them. Some lenders don’t like people with lots of credit available to them.
- Check your financial links. Make sure you don’t have any unnecessary links to former partners of other family members. If they have a bad credit rating, it could bring yours down.
- Use savings to pay off debts. It’s always nice to have money tucked away in case of an emergency. But the chances are, the interest you pay on your debts will be far higher than the interest you receive from your savings.
- Check your credit report at least once a year. Make sure that everything is up to date and there are no nasty surprises on there.
- Build up your credit rating. If you have little or a poor credit history, look at improving it. One method is to take out a prepaid credit card.
- Check your address is correct on all of your accounts such as mobile phones and credit cards. If you have different addresses listed, it could prove a problem when applying for finance.
- Don’t withdraw cash on credit cards. This won’t only cost you more, but often shows lenders that you aren’t great at managing money. My one exception to this is the Halifax Clarity card, which is great for withdrawing money abroad.
Where can I check my credit rating?
Checkmyfile. This site uses information from all the credit report agencies. You can sign up for a 30-day free trial and then it will cost £14.99 per month.
Noddle. Free to sign up to.
Experian. Another site free to join.
Equifax. Free for 30 days, and then £14.95 per month.
I would recommend people join Noddle and Experian as soon as you can. It doesn’t cost and the reports contain useful information. Equifax may be best left until you are about to apply for major finance such as a mortgage, or if you think there might be a problem with your file. However, don’t forget to cancel as £14.95 is not cheap.
Checkmyfile mainly draws information from Noddle, Experian and Equifax, so it’s not important to sign up to.
Still need help?
Money Saving Expert has launched the Credit Club. This is free to sign up to and provides you with a credit report from Experian and will give you a good indication on how much you can borrow without impacting your credit score. Find out more here.