In the UK, there is no single, comprehensive number linked to your identity that dictates a lender – be it a bank, credit card company, mobile phone company or anyone else – whether it should take you on as a customer.
What you do have is a credit file, to which you are legally entitled. It contains important public and private information about you, such as whether you are on the electoral roll, any financial ties to other people, court rulings or decrees, and any credit products you have owned in the past six years — plus whether you paid on time.
It’s important to check these files for errors at least once a year, or before a large application, because even minor problems can block applications (on one program, I found out why a woman kept getting mortgage rejections). to a problem with an incorrect address for a cell phone she no longer used).
There are three credit reporting agencies and they all have files available online. Check them all. There are many ways to access this – I focused on the easy, free ways. Go for Experian via my www.creditclub.com, for Equifax www.clearscore.comand for TransUnionUni www.creditkarma.co.uk.
Hold on, I have a credit score, I know what it is!
That is a very common reaction. Years ago, the commercial focus of credit reporting agencies was to monetize providing information to lenders. Consumers’ legal right to access their information was a pain they had to endure. Then a bright spark realized that the public was an untapped source of income and started looking at things to sell or market to them.
A big one was a credit score (using people’s residual knowledge that this is real in other countries). That’s why they now give you a seemingly important number – for Equifax it’s from the 700, TransUnion 710 and Experian 999 – that apparently dictates your financial life.
The first clue that there isn’t one universal credit score is that it’s different for every business!
Every lender scores you differentlyWhen you apply for a credit, each lender rates you in its own way, using its custom scorecard. It adds all the data it talks about you — from your credit file, application form, and any previous transactions you’ve had with it — to determine if you’d be a profitable customer.
Note: I’m talking about profit, not risk. While risk is a big factor – someone with a history of defaults is likely to be unprofitable for most lenders – it’s not the only factor. A bank may offer a loss-making credit card to sell customers a mortgage, so the actual score may affect how desirable you are for it. The secretive nature of credit scoring makes it hard to ever really know.
The credit score you get is just a rough model
The number you get is basically just the credit reporting agency’s indication of how a typical lender might see you based on your credit history. Useful, but not gospel (more like a gambling buddy) because: Each lender has their own scoring system; and credit history is just part of what lenders look at. In fact, the affordability test is just as important as your creditworthiness to lenders. For that, the most important thing you need is how much you earn – which is something credit reporting agencies don’t know and so it doesn’t factor in in the score you get.
Take someone with an excellent credit history, making £50,000 and applying for a loan of £5,000. They will probably be accepted. If they lose their jobs and continue to repay credit on time, their credit histories won’t deteriorate — but with no income, they’ll likely be turned down.
Don’t worry about small moves, worry about big big
I’m often approached on social media by people who fear their ‘credit score’ has dropped by 20 points – often when they’ve done something they didn’t think would be negative, like taking out an unused credit card.
However, some lenders will see that as a positive, since you have less credit available. Others are negative, as longstanding accounts are evidence of a good track record of loyalty. And more factors, such as your overall credit, debt, and how it compares to your income, can also affect how they view it.
So, for example, if you close a card or open a new bank account and see your credit score drop by 20 or 30 points, don’t worry. It’s just a loose picture of whether you’re a good or a bad risk to the hypothetical average lender.
However, large drops should be taken seriously. It’s a good indication that your details have changed, suggesting that you’ve committed a real credit sin, such as missing a payment, exceeding your limit, or defaulting. If not, find out why and check your credit file – this could be an error or identity theft.
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