These days, the contents of your credit report can affect your quality of life – from whether you can rent a flat, find a job, or obtain financing for a car, home, or personal loan. With your credit score representing you so often, it’s important to know how to read your credit report, and spot [...]
Every credit account you have opened will be listed on your credit report. If you have delinquent accounts or have filed bankruptcy, that information will remain on your account for the next six years. This information is utilised by lenders as a way to determine how risky lending money to you will be for them. Most lenders come up with a numerical representation of the contents of your credit file, called a credit score.
How does a lender determine my credit score?
Every lender uses a different credit score, and may possibly even access multiple credit scores. Credit reference agencies often have their own scoring system, and lenders can use the score established by a reference agency rather than taking the time to calculate their own score. For example, Experian calculates a credit score based on the information they have in an individual’s credit file. The range is as follows:
- Very Poor: 0 – 560
- Poor: 561 – 720
- Fair: 721 – 880
- Good: 881 – 960
- Excellent: 961 – 999
Be advised that not every lender will be concerned with your Experian score in particular. You may know that you have a score of 850 according to Experian, but that will mean nothing to a lender if they don’t use the Experian credit scoring system.
You may decide that you will go to a credit reference agency and request your credit score. Upon accessing your score, you’re surprised to know that you’re listed in the “Poor” category. Does this mean you will not be able to find a lender? Not necessarily.
As each lender has a different way of calculating your credit score, they also have a different way of deciding if you’re worthy of credit. Some lenders may be willing to lend to people with bankruptcies or missed payments in their credit history. However, these lenders will usually charge a higher interest rate on a loan lent to someone with low credit as compared to someone with average or high credit. Since the lender realises that lending you money is a risk if you have a habit of failing to pay back your debts, they will try to make up for the risk they are taking on by charging you more in interest. Some lenders may even decide not to lend to you – that’s completely up to the individual lender.
There is no magic number in credit scores that lenders look for. Based on the Experian scale, some lenders may only lend to people with scores above 880, while others may be willing to lend to people having a score of 500. It’s really up to your lender to decide whether they’re willing to take on that risk. If you do have a low credit score, and you’re worried about being approved for a loan, you can often find information online about companies that advertise poor credit loans.
What might be bringing my credit score down?
Your credit score is affected by any negative item contained in your credit file. This could be as simple as opening too many accounts at once, or even just applying for too many accounts. If you’ve missed payments or been late paying your bill, there will be a note on your credit file accompanying the credit account listing. Sometimes debtors are so late paying back their bill that the lender assumes they’ll never be able to collect any money from the debtors, which will be noted in a credit file.
Never use all or most of the credit available to you. You should try to keep the amount of debt you owe at or below 40% of your total credit limit. If you have two credit cards totalling £2,500 in available balance, you should never owe more than £1,000 between the two cards. A high percentage of debt owed based on credit available will have a negative effect on your credit score.
Finally, bankruptcies and foreclosures are both listed in your credit file, and must stay on your account for six years. If it have been more than six years since a bankruptcy or foreclosure and the item has not been removed from your credit report, contact the credit reference agency to assure removal.
What are some ways to raise my credit score?
If you’ve discovered that your score is low, don’t lose hope. You will be able to raise your score, but it does take time and effort. The first step to improving your credit score is to know why your score is poor. Contact one of the three credit reference agencies in the UK – Experian, Equifax, or Call Credit – and request a credit report. This will cost you £2, and you should receive your report within seven working days.
You need to assure that everything in your report is accurate, from your name and address to the number of credit accounts in your name. If there are mistakes, you’ll need to contact the credit reference agencies to clear it up.
Pay attention to the accounts that are bringing your score down. You can call these lenders and try to compromise on payments if you’re struggling to keep up. If the timing of the payment is inconvenient for you, the lender may be able to do a one-time changing of the monthly due date. This may be helpful if you’re paid once or twice a month and would prefer to pay your bill shortly after you get paid.
You need to use credit to get credit, so don’t stop using credit all together. Instead, make an effort to pay your balances in full and on time, if not early. This also saves you money since interest will not accrue on the balance you owe.
After you get your credit under control, access your credit report at least once a year to make sure you’re still on track for a bright financial future.