Where does your credit score come from?

Your credit report is a tool used by potential lenders to assist them in reaching a decision as to whether or not to accept your application for credit. The higher your credit score, the less risk there is that you will be rejected. Conversely, if your credit score is low, you are likely to find it rather more difficult to secure the loan, credit card or other form of borrowing that you require.

It therefore makes complete sense to check out the current status of your credit reports before you start to submit applications for credit. If you fail to do so, you may inadvertently enter a financial vicious circle. This is because if you apply and are rejected, this may well prompt you to apply to other creditors – who will see from your credit file that you have been recently turned down. This in turn increases the likelihood that they will reject you too. Multiple applications are a red flag to most lenders, as they can indicate that you are struggling financially or may have been a recent victim of fraud.

The key thing to bear in mind about credit scores is that there is no such thing as a single score. Each lender has its own set of criteria that it applies when calculating a credit score, so where one might score you fairly highly, another may see you as a risk.

However, it is perfectly possible to get an overview of how lenders are likely to score you by applying for a copy of your credit file, which is held by one of a number of credit reference agencies. These include Equifax, Experian and CallCredit. Remember that these agencies do not determine your credit score – that is done by the individual lenders. They simply hold them on file.

You have the legal right to access your credit record, and it is quick and easy to get hold of a statutory copy. This contains fairly basic information and will cost you around £2. If you want a more detailed report, you can opt to pay for a monthly credit monitoring service. This will give you a more thorough account of your credit history, and you will also be contacted should the service notice anything unusual – for example, if someone is attempting to open a bank account or apply for credit in your name.

The way in which you credit score is presented depends on which agency you have gone through. Equifax and Experian will allocate you a credit score out of a maximum of 999. By contrast, CallCredit uses a different system which ranks you from 0 to 5. Whatever agency you choose, you will find that the higher the score, the better the lending prospect you will be perceived to be by potential lenders. If your credit score comes back lower than you anticipated, take some time to check the report over for any errors. For example, the report may indicate that you made a late payment when you know you did not. If you can prove this – with a bank statement or other form of proof – you are able to approach the agency involved and ask them to correct the mistake. If the agency rejects your request, you have the right to include what is known as a ‘notice of correction’ on your file. This will be seen by any lenders looking at your file and will explain to them why the information shown is not accurate.

Of course, there a number of simple ways in which you can improve your credit score should you need to do so. Most critically, you need to ensure that your correct information is listed on the electoral roll. You should then try to reduce your debt as much as possible, and always pay on time. This will help to show lenders that you are capable of managing your finances responsibly. If you have credit cards that you no longer use, make sure that the accounts are completely shut down rather than simply cutting up the cards. Ensure that you are completely up to date with your debt repayments. The easiest way of doing this is to set up a direct debit for each monthly payment.

Credit infographic final

 

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