How to manage your credit rating
Scenarios like these could be caused by a damaged credit rating. Perhaps you missed a bill, or several, in the past. Or, more seriously, you’ve fallen victim to identity theft. Alternatively, you may simply be refused some financial products because you’ve little or no credit history.
But whatever the reason, the result may cause serious problems. You may find you can’t even rent a property, leaving you struggling to find somewhere to live. The lower your rating, the more issues you could face.
Only those with untarnished credit histories get the best deals on financial products. Credit card companies, for example, only have to offer their best rates to 51% of applicants – and you can bet those successful have the brightest and shiniest credit records. So if you’re stuck with a poor rating, you may face paying hefty amounts in interest, piling on more debt problems.
Considering that your ‘financial CV’ can impact on your life in numerous ways, how do you go about giving it a health check? And what can you do if you find it’s tarnished in any way?
HOW TO CHECK YOUR CREDIT RATING
There are several credit rating websites that make it simple to monitor your financial profile but ensure you pick a reputable one. Each site uses a different point scoring system but the classification is the same – so if you have a good credit score with one, you should have the same if you checked with another. The latest to launch is ClearScore (Clearscore.com), in partnership with credit reference agency Equifax. It offers free access for consumers to their credit score and report, along with tips on how to manage and improve it. Other sites offer free access only through free trials that require you to enter payment details and remember to cancel within around a month of signing up or else incur a regular monthly charge.
The ClearScore website is simple to use and you don’t need to give any account details. Instead, you state your name, address and date of birth, and it’ll list the financial products you have, and give you a score out of 700 within a few minutes (the higher the number, the better). This will tell you whether you’re on good ground or there’s room for improvement. All the credit ratings companies have slightly different scoring systems, so while you can’t really compare one with another, the benefit of any scoring system is that you can monitor it over time so you can check if there has been any change and take action if it gets worse.
ClearScore makes money by presenting consumers with products matched to their credit profile but guarantees that privacy is protected as data won’t be sold.
Noddle.co.uk, part of the Callcredit Information Group, also offers free credit reports. Debit or credit card details are required for sign up for ID verification but these won’t be used unless you subscribe to an additional service.
While free, the company markets optional add- ons. These include Noddle Improve, offering advice on boosting your credit score, and Noddle Web Watch, which searches the internet to find if your personal details are being sold fraudulently.
Other options include Experian (Experian.co.uk) and Equifax (Equifax.co.uk). Both offer a 30-day free trial if you want to get hold of a one-off copy of your credit report.
Remember to cancel your trial within this period or you’ll automatically be signed up for a monthly fee. Equifax charges £14.95 a month, while Experian charges £14.99. Meanwhile, along with Callcredit (Callcreditstatreport.co.uk), they are all legally required to offer one-off access to credit reports for a £2 charge.
Whichever service you use, once you’ve entered the necessary details on a credit reference site, you’ll get a score. This will give you an idea of whether you need to be concerned about it. You’ll be shown all credit agreements you’ve had within the past six years, whether settled or active.
Credit reports also flag any red marks on your file, from missed payments, say, to County Court Judgments (CCJs) in the past six years. Bankruptcy orders also appear on your report for six years even if you are discharged. If you settle a CCJ, it’ll still be shown but as settled.
IF YOU SPOT A MISTAKE
If there is an error, contact the lender and ask for it to be corrected. If you don’t know which provider the problem lies with, contact the credit reference agency. A company could have listed you as in default by mistake. Or it could prove more serious if a fraudster is taking out credit contracts in your name.
James Jones, head of consumer affairs at Experian, says: “A ‘notice of correction’ can be added to a file to explain the reasons behind a period of financial difficulty – and this is seen by any lender using the data in the future.” A correction should appear within 28 days.
You might be surprised to find your score lower than expected, particularly if you always repay on time and are particularly financially responsible. However, Justin Basini, co-founder of ClearScore, says: “Your score is formed using many different factors. For instance, having many credit cards open that are never used could negatively impact your score.
“It may sound counter-intuitive but if you have very little or no credit, your score will often be lower. This is because lenders are looking for evidence that you can pay back your credit responsibly.”
Beware how sharing accounts with others can impact your credit rating. Research by uSwitch.com revealed that more than two million people have suffered financially as the result of an ex-partner running up a debt from shared accounts – averaging £457. And more than two-thirds of those who have shared a financial product with an ex said the account was still open five years after they broke up.
If you do break up with your partner, close all shared accounts and contact each of the three main credit agencies to remove any financial links between you and your ex.
Your credit score is a three-digit number (ranging from a low of 300 to a high of 850) calculated from the information in your credit report. Your credit score enables lenders to determine how much of a credit risk you are. Basically, a low credit score indicates you present a higher risk of defaulting on your debt obligations than someone with a high score. If you have a low credit score, any products you successfully apply for will carry a higher rate of interest commensurate with this risk.
A report containing detailed information on a person’s credit history, a record of an individual’s (or company’s) past borrowing and repaying, including information about late payments and bankruptcy. It also includes all applications a person has made for financial products and whether they were rejected or accepted. Your credit report can be obtained by prospective lenders to determine your creditworthiness.
A County Court Judgement is a legally issued strike by a lender against a person who has failed to keep to the terms of a credit agreement, usually by habitually failing to make the payments on a loan, credit card or mortgage. A CCJ will appear on a person’s credit record for six years and will certainly affect future applications for credit.
A person (or business) unable to pay the debts it owes creditors can either volunteer or be forced into bankruptcy – a legal proceeding where an insolvent person can be relieved of their financial obligations – but loses control over their bank accounts. Bankruptcy is not a soft option. Although it may wipe the financial slate clean, it is extremely harmful to a person’s credit rating (it will stay on your credit record for six years) and will adversely affect your future dealings with financial institutions. Bankruptcy costs £600 paid upfront.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.