Most of us wonder from time to time how good (or bad) our credit rating might be – but despite common misconceptions, there is no such thing as a definitive credit rating, or score, for any individual.
In fact, there is only your credit history – details of which will be held within your credit report (also known as your credit file).
Credit reports and ratings are shrouded in myth and misunderstanding, and the mistaken notion that everyone has a ‘number’ which denotes their credit worthiness is worryingly widespread.
In this 60 second guide you’ll find the essential facts everyone should know about credit ratings, as well as tips for checking your credit report and ensuring it is accurate.
1. There isn’t just one version of your credit report
In fact, there are three ‘versions’ of it held by three separate credit reference agencies (CRAs): Call Credit, Equifax and Experian.
Each of these agencies will hold a file on you, detailing your previous borrowing behaviour – known as your credit history. The file will contain basic information about you, as well as details of:
- What credit accounts you have held;
- How much you currently owe lenders;
- Whether you are up to date with payments;
- Whether you have ever made late repayments, been in arrears, been declared bankrupt or had an Individual Voluntary Arrangement (IVA) or County Court Judgement (CCJ) declared against you.
The information held by the three agencies may not be identical, so it’s important to look at all three files if you want a clear idea of how you are likely to be viewed by lenders.
Different lenders will access different CRAs’ files when assessing your application for a credit card, loan or mortgage – which may involve the calculation of a subjective ‘score’ denoting how risky a customer you are. Therefore, it’s crucial to ensure all three versions of your credit report are accurate by checking them regularly.
2. Your credit history will affect the cost of borrowing
The information held on your credit report will help a company choose whether or not to lend to you when you apply for a credit card or personal loan.
However, it may also influence the product you are offered and the rate at which credit is extended to you. This is because many lenders use risk-based pricing.
Where lenders advertise ‘typical’ APRs, they are only obliged to offer that rate to as few as 51% of successful applicants – with the remainder potentially offered credit cards or loans at higher interest rates if they are deemed to be ‘riskier’ borrowers.
Therefore the contents of your credit report can affect the cost of any credit you are offered – not just whether you can obtain a credit card or loan.
3. You have the right to correct mistakes
It’s important to be aware that, if you see mistakes on your credit file, you have the right to correct them.
You might find incorrect address details on your credit file, or discover that inaccurate information has been provided by your bank – but whatever the error, it could put another company off lending to you and so should be dealt with as soon as possible.
To correct a mistake, write to the relevant credit reference agency and ask for it to deal with the error immediately. Make sure you include an explanation about why it’s wrong, and include any evidence you have.
The agency has 28 days to act, and if it doesn’t amend your records you have a legal right to send it a notice of correction (up to 200 words), which will be added to your file.
4. ‘Good behaviour’ doesn’t guarantee a good credit rating
Managing your money well – particularly if this means never borrowing – won’t necessarily mean you are more likely to be approved for credit when you need it.
In fact, if you have never borrowed before you are likely to have little in the way of a credit history – or will possess what is known among experts as a ‘thin’ credit file.
This means companies won’t be able to see evidence that you have used credit responsibly in the past, and may therefore be reluctant to lend to you.
While it seems counter-intuitive, people who have led totally debt-free lives often find it harder to get credit than those who have used credit cards and loans previously.
5. Small changes could improve your credit rating
If you’re concerned about your credit report and would like to improve your chances of getting credit, there are things you can do.
Making small changes such as ensuring you are on the electoral roll, closing old credit card accounts and ending any financial associations you have with ex-partners should help.
Furthermore, it’s important to think about the timing of your credit applications and space these out appropriately; too many attempts to borrow in a short space of time can send the wrong message to lenders about your financial stability.
To learn more about your how credit reports work, read the Which? Credit reports explained advice guide.
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